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M. P i ■


Pu b l i s h e d





jam es

Hu m p h r e y s ,


Cornei of Second and Walnut-street?
Federal Reserve Bank of St. Louis

Federal Reserve Bank of St. Louis



H E first intention o f the W o f the followin« pages was merely to expose some popular
errors which related chiefly to the suspension o f the
cash payments o f the Bank o f England, and to the in­
fluence o f our paper currency on the price o f provisions.
But in pursuing his purpose, many questions occurred
which it seemed important to discuss, partly on account
of their having some bearing on the topics under con­
sideration, and partly because they appeared to be o f
oeneral importance, and had either been left unex­
plained, or had been inaccurately stated by those Eng­
lish writers who have treated o f paper credit. This
work has, therefore, assumed, in some degree, the cha­
racter o f a general treatise.
The f r s t Chapter contains a few preliminary ob­
servations on commercial credit. The object o f the
two following Chapters is distinctly to describe the
several kinds o f paper credit; to lay down some gene-

Federal Reserve Bank of St. Louis


ral principles respecting it; and, in particular, to
point cnit the important consequences which resultfrom
the different degrees o f rapidity in the circulation o f
different kinds o f circulating medium, and also in the
circulation o f the same medium at different periods o f
The nature o f the institution o f the Bank o f Eng­
land is then explained; the necessity o f maintaining
the accustomed, or nearly the accustomed, quantity o f
its notes, however great may be the fluctuation o f its
cash, is insisted on; and the suspensio?i of its cash pay­
ments is shewn to have resulted neither from a defici­
ency in its resources, norfrom a too great extension o f
its loans to government, nor from rashness or improvi­
dence in its directors, but from circumstances which
they had little power o f controuling; this event being
one to which a national establishment, like the Bank of
England, is, in some situations o f the country, una­
voidably subject:
The manner in which an unfavourable balance of
trade effects the course o f exchange, and in which an
unfavourable exchange creates an excess o f the market
price above the mint price o f gold, and a profit on the
exportation o f our coin, are the subjects o f a succeed­
ing Chapter.
The circumstances, also, which have led to the mul­
tiplication o f our country banks, and the several ad­
vantages and. disadvantages o f those institutions, are
fu lly stated.
The earlier parts o f the work having tended to shew
the evil of a too great and sudden diminution o f our
circulating medium, some o f the latter Chapters are
employed in pointing out the consequences o f a too
great augmentation o f it. The limitation o f the amount
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5 '

of the notes o f the Bank o f England is shewn to be the
means o f restricting the quantity of the circulating
paper o f the kingdom, o f preventing a rise in the price
o f commodities in Great Britain, and of thus extending
our exports and restraining our imports, and render­
ing the exchange more favourable. Some objections to
the limitation o f the Bank o f England paper are like­
wise stated and answered.
The last Chapter treats of the in f uenee o f paper cre­
dit on the price o f all the articles o f life: a subject,
the difficulties o f zvhich are in some degree removed by
the antecedent discussions.
In the course o f this inquiry, several passages in the
work o f Dr. A. Smith on the Wealth o f Nations are
animadverted on, as are also some observations made
by M r. Hume in his Essays on Money and on the
Balance o f Trade, and by Sir James Stewart in his
book on Political Economy, as well as some remarks in
the writings o f Locke and Montesquieu.
The mode in which the subjects o f coin, o f paper
credit, o f the balance o f trade, and o f exchanges (sub­
jects intimately connected with each other), have been
treated by those writers, was suggested by the circum­
stances o f more early times: and we ought not to be
surprised, if, in treatises necessarily in some degree
theoretical, or written fo r the purpose o f establishing
a particular truth, certain incidental obseiwations
should not be just, nor even i f some main principles
should have been laid down in terms not sufficiently
A person who presumes to differ from the authorities
which have been mentioned, and who proposes to cor­
rect the public opinion on the important subject o f our
paper credit, ought, undoubtedly, to be very cautious
Federal Reserve Bank of St. Louis


lest he should propagate new errors while he is endea*
vouring to remove the old. A sense o f the duty o f ma­
ture consideration has caused some delay in the publi­
cation o f the following work. That its leading doc­
trines are just, the writer feels a.confdent persuasion.
That it may have imperfectiffis, and some, perhaps,
which greater care on his part might have corrected,
he cannot doubt'. B ut■he trusts, that a man who is
much occupied in the practical business o f life, will be
excused by the public, i f he should present to them a
treatise less elaborate, and, in many respects, more in­
complete, than those on which he has found it necessa­
ry to remark. Future inquirers may possibly pursue
with advantage, some particular topics on which he has
fe lt a certain degree o f distrust.
I t may not be irrelavant or improper to observe, that
the present work has been written by a person^ whose
situUtion in life, has supplied information on several o f
the topics under discussion, and that much use has been
made o f those means o f correcting the errors o f former
writers which recent events have afforded.
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O F Commercial C redit ; o f Paper Credit arisin g out o f it.
Commercial C apital


: <0
. I

O f Trade by B arter. O f Money. O f B ills o f Exchange and
Notes. O f B ills and N otes, considered as discountable Articles.
O f F ictitiou s B ills, or B ills o f Accommodation




O f circulating Paper. O f Bank Notes. O f B ills considered as
circulating Paper. O f the different Degrees o f R apidity in the
Circulation o f different Sorts o f circulating Medium, at different
Times. Error o f D r . A . Smith. Difference in the Quantity
w an ted f o r effecting the Payments o f a Country in Consequence cj
this Difference o f R apidity : P roof o f this taken from Events o f
1793. Fallacy in v o lv e d in the Supposition that Paper Credit
might be abolished




O bservation o f D r . Sm ith, respecting the Bank o f England
O f the Nature o f that Institution : Reasons f o r never greatly
diminishing its Notes ; its L iability to be exhausted o f Guineas :
the Suspension o f its Cash Payments not owing to too great Issue
o f P aper, nor to too great Loans. Propriety o f Parliamentary




O f the Balance o f Trade. O f the Course o f Exchange : Tendency
o f an unfavourable Exchange to take a w a y G old: o f the P roba­
bility o f the Return o f Gold : o f the Manner in which it may be
supposed that the exported Gold is employed on the Continent. Reasonsfor having renewed the L a w f o r suspending the Cash P a y ­
ments o f the Bank o f ■England

O F"

Of PiiiLA DO K U
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Error o f imagining th at Gold can be provided a t the Time o f attu al
D istress. Reasons f o r not adm itting the Presumption that the
Directors o f the Bank must h ave been to blame, f o r not making,
beforehand, a more adequate Provision

O f Country Banks : their A dvantages and D isadvantages


O f the Tendency o f a too great Issue o f Bank P aper to produce an
, Ce™ ° f ™e M arket Price above the M int Price o f G o ld : o f
toe Means by which it creates this Excess, v i z . by its Operation
on the Price o f Goods, and on the Course o f Exchange . Errors
o f D r . A . Smith on the Subjett o f Excessive Paper. O f the
Manner in w h ich the Lim itation o f the Quantity of the Bank o f
England Paper serves to lim it the Q uantity, and sustain the V a­
lue o f a ll the Paper in the Kingdom

O f the Circumstances w hich cause the Paper o f the Bank o f England,
as w e ll as a ll the other Paper o f the Country, to f a i l of having
their Value regulated according to any exact Proportion to the
Quantity o f Bank o f England Notes

j gg

Objections to the Dodirme o f the tw o preceding Chapters answered.
O f the Circumstances w hich render i t necessary that the Bank
should impose its own L im it on the Quantity o f its Paper. Effedi
o f the L a w against Usury. P roof o f the necessity o f restricting
the Bank Loans, d raw n from the Case o f the Transfer o f C a p t
ta l to Foreign Countries


O f the Influence o f Paper Credit on the Price o f Commodities. O b­
servations on some Passages o f Montesquieu and Hume. Con­
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C H A P T E R I.
O f Commercial Credit. O f Paper Credit, as arising
out o f it. O f Commercial Capital.
O M M E R C IA L credit maybe defined to be that
confidence which subsists among commercial men
in respect to their mercantile affairs. This confidence
operates in several ways. It disposes them to lend
money to each other, to bring themselves under vari­
ous- pecuniary engagements by the acceptance and
endorsement of bills, and also to sell and deliver goods
in consideration of an equivalent promised to be given
at a subsequent period. Even in that early and rude


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state ot society, in wnich neither bills nor money are
as yet known, it may be assumed, that if there be
commerce, a certain degree of commercial credit will
also subsist. In the interchange, for example, of com­
modities between the iarmer and the manufacturer, the
manufacturer, probably, will sometimes deliver goods
to the farmer on the credit of the growing crop, in
confidence that the farmer will come into possession
of the fruits of his labour, and will be either compel­
led by the law of the land, or induced by a sense of
justice, to fulfil his part of the contract when the har­
vest shall be over. In a variety of other cases it must
happen, even in the infancy of society, that one man
will deliver property to his neighbour without receiving, on the spot, the equivalent which is agreed to
be given in return. It will occasionally be the in­
terest of the one party thus to wait the others con­
venience: for he that reposes the confidence will
receive in the price an adequate compensation for the
disadvantages incurred by the risk and the delay. In
a society in which law and the sense of moral duty are
wreak, and property is consequently insecure, there
will, of course, be little confidence or credit, and
there will also be little commerce.
This commercial credit is the foundation of paper
credit; paper serving to express that confidence which
is in the mind, and to reduce to writing those en­
gagements to pay, which might otherwise be merely
verbal. It wfill hereafter be explained in what manner,,
and to how very great a degree, paper credit also spares
the use of the expensive article of gold; and how the
multiplication of paper securities serves to enlarge, con­
firm, and diffuse that confidence among traders, which.
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ji some measure, existed independently of paper, and
would, to a certain degree, remain, though paper
should be abolished.
If there may be a convenience in giving credit in
the infancy of society, when the interchange of com­
modities is small, there may be, at least, the same
convenience when goods begin to be multiplied, when
wealth is more variously distributed, and society is ad-,
The day on which it suits the British merchant to
purchase and send away a large quantity of goods, may
not be that on which he finds it convenient to pay
for them. I f it is made necessary for him to give
ready money in return, he must always have in his
hands a very large stock of moneys and for the ex­
pense of keeping this fund (an expense consisting
chiefly in the loss of interest) he must be repaid in the
price of the commodities in which he deals. H e avoids
this charge, and also obtains time for preparing and ad­
justing his pecuniary concerns, by buying on credits
that is to say, by paying for his goods not by money,
but by the delivery of a note in which he promises the
money on a future day. He is thus set more at liberty
in his speculations; his judgment as to the propriety
of buying or not buying, or of selling or not selling,
and also as to the time of doing either, may be more
freely exercised.
The general principle, according to which the
length of the customary credit in different trades has
adjusted itself, seems clearly to have been that of
mutual advantage and convenience. For example, if
we suppose the merchant importers of any particular
article for home consumption to be generally rich, and
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the retailers of it to be poor— that is, to have a capital
insufficient to enable them to keep the assortment and
stock of goods necessary in their retail commerce—
the credit customarily given by the importers, and
taken by the retail traders, will naturally be long. In
other words, it will be the custom of the importers to
lend part of their capital to the retail dealers, in con­
sideration of an advantage in the price proportionate
to the benefit conferred by the loan. Sometimes two
or more customs prevail, as to the period of credit, in
the same trade; and to each custom there are indi­
vidual exceptions. The deviations from the rule ob­
viously arise out of that principle of mutual advantage
and convenience on which the rule itself has been
The option of buying and of selling on longer or
shorter credit, as it multiplies the number of persons
able to buy and to sell, promotes free competition, and
thus contributes to lower the price of articles. A
variety of degrees in the length of credit which is
afforded, tends more especially to give to some of the
poorer traders a greater power of purchasing, and
cherishes that particular sort of competition most
adapted to lower prices, namely, the competition of
dealers likely to be contented with a very moderate
rate of gain. Opulent merchants sometimes complain
of the intrusion of dealers who possess a small capital
and take long credit, for this very reason, that such
dealers reduce the profits of trade.
But the custom of taking and giving long credit
has its inconveniencies as well as its advantages. It
increases the amount of the bad debts incurred in the
course of commercial transactions. The apprehension
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of loss, is, therefore, continually opeiating on the
mind of the lender as a restraint on the custom Oi
giving credit, while the compensation he receives foi
the use of the capital which he supplies, acts as an
encouragement to the practice. The subsisting state
of credit may, in general, be considered as resulting
out of a comparison made both by lenders and borrow­
ers of the advantages and disadvantages which each
discover that they derive from giving and taking
Mercantile confidence, however, is not always dealt
out in that proportion in which there is leasonaDi’c
ground for it. A t some periods it has risen to a most
unwarrantable height, and has given occasion to tL^
most extravagant and hurtful speculations. O f thesv.
the cases of the Ayr bank, and of the South Sea
scheme, are instances. Evils of this kind, however,
have a tendency to correct themselves. In a country
possessed of commercial knowledge and experience,
confidence, in most instances, will not be misplaced.
Some persons are of opinion, that, when the custom
of buying on credit is pushed very far, and a great
quantity of individual dealings is in consequence cairied on by persons having comparatively little pro­
perty, the national commerce is to be considered as
unsupported by a proper capital; and that a nation,
under such circumstances, whatever may be its osten­
sible riches, exhibits the delusive appearance oi
It must, however, be remembered, that the prac­
tice of buying on credit, in the internal commerce o.
the country, supposes the habit of selling on ^re K
also to subsist; and to prevail, on‘ the whole, m an
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exactly equal degree. In respect to the foreign trade
o f a country, the practice of dealing on credit indicates
poverty or riches, in proportion as the credit generally
taken is longer or shorter than the credit given. The
custom which tradesmen have of selling to the con­
sumers on credit, is also an indication of wealth in the
commercial world: the traders must possess a surplus
of wealth, either their own or borrowed, which bears
an exact proportion to the amount of debts due to
them by the consumers. Thus that practice of trading
on credit which prevails among us, so far as it subsists
between trader and trader, is an indication neither of
wealth nor of poverty in the mercantile body; so far as
it respects our transactions with foreign countries, is
an indication of extraordinary wealth belonging to the
merchants of Great Britain; and so far as it respects
the trade between the retailer and the consumer, and
implies a deficiency of wealth in the consumers, and a
proportionate surplus of it among commercial men.
The existing customs imply, that, on the whole, there
is among our traders a great abundance of wealth.
I t may conduce to the prevention of error, in the
subsequent discussions, to define, in this place, what
is meant by commercial capital. This consists, first,
in the goods (part of them in the course of manufac­
ture) which are in the hands of our manufacturers and
dealers, and are in their way to consumption. The
amount of these is necessarily larger or smaller in
proportion as the general expenditure is more or less
considerable, and in proportion, also, as commodities
pass more or less quickly into the hands of the con­
sumer. It further consists in the ships, buildings,
machinery, and other dead stock maintained for the
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purpose of carrying on our manufactures and com­
merce, under which head may be included the gold
found necessary for the purposes of commerce, but at
all times forming a very small item in this great ac­
count. I t comprehends also the debts due to our
traders for goods sold and delivered by them on credit;
delfts finally to be discharged by articles of value
given in return.
Commercial capital, let it then be understood, con­
sists not in paper, and is not augmented by the mul­
tiplication of this medium of payment. In one sense,
indeed, it may be increased by paper. I mean, that
the nominal value of the existing goods may be en­
larged through a reduction which is caused by paper
in the value of that standard by which all property is
estimated. The paper itself forms no part of the
This mode of computing the amount of the national
capital engaged in commerce, is substantially the same
with that in which each commercial man estimates
the value of his own property. Paper constitutes, it
is true, an article on the credit side of the books of
some men 5 but it forms an exactly equal item on the
debit side of the books of others. It constitutes,
therefore, on the whole, neither a debit nor a credit.
The banker who issues twenty thousand pounds in
notes, and lends in consequence twenty thousand
pounds to the merchants on the security of bills ac­
cepted by them, states himself in his books to be
debtor to the various holders of his notes to the extent
of the sum in question; and states himself to be the
creditor of the accepters of the bills in his possession
to the same amount. His valuation, therefore, of his
Federal Reserve Bank of St. Louis


own property, is the same as if neither the bills nor
the bank notes had any existence. Again; the mer­
chants, in making their estimate of property, deduct
the bills payable by themselves which are in the drawer
of the banker, and add to their estimate the notes of
the banker which are in their own draw er; so that
the valuation, likewise, of the capital of the mer­
chants is the same as if the paper had no existence.
The use of paper does not, therefore, introduce any
principle of delusion into that estimate of property
which is made by individuals. The case of gold, on
the other hand, differs from that of paper inasmuch
as the possessor of gold takes credit for that for which
no man debits himself.
The several commercial
capitals of traders, as estimated in their books, would,
unquestionably, be found, if deducted from their other
pfoperty and added together, to correspond, in amount
with a general estimate of the commercial stock of
the country, calculated under the several heads already
It is true, that men, in estimating their share in the
public funds of the country, add to their estimate a
debt due to them which no individual deducts from
his valuation, On this head, it may be observed,
that the nation is the debtor. But the commercial
capital, which has been described, exists indepen­
dently of capital in the public funds. The man in
trade has property in trade. I f he has property in
the stocks, he has the property in trade in addition
to it. In speaking, therefore, of the commercial
capital, whether of the nation or of an individual, the
idea that any part of it is composed either of the paper
credit or of the stocks of the country, is to be totally
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O f Trade by Barter.
O f Money.
O f Bills o f
Exchange and Notes. O f Bills and Notes, con­
sidered as discountable Articles.
O f fictitious
Bills, or Bills o f Accommodation.
O C IET Y , in its rudest state, carries on its trade
by the means only of barter. W hen most ad­
vanced, it still conducts its commerce on the same
principle; for gold and silver' coin, banker’s notes,
and bills of exchange, may be considered merely as
instruments employed for the purpose of facilitating
the barter. The object is to exchange such a quan­
tity of one sort of goods for such a quantity of ano­
ther, as may be deemed, under all circumstances, a
suitable equivalent.*


* By the term suitable equivalent, is not intended that equivalent
which an impartial umpire, determining according to the strict rule of
equity, might dictate. T h e equivalent obtained by men dealing in the
way o f barter is not exactly o f this sort; for that power which the pro­
prietors o f a scarce and necessary commodity hav* over the consumers of

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Barter being soon felt to be inconvenient, the pre­
cious metals are resorted to as a measure of value,
they being, at once, portable, steady in their price,
and capable of subdivisions. The state fixes a stamp
upon them, in order thus to certify the quantity and
fineness of each piece.
The precious metals, when uncoined (or in the
state of bullion), are themselves commodities ; but
when converted into money they are to be considered
merely as a measure of the value of other articles.
They may, indeed, be converted back into commodi­
ties ; and it is one recommendation of their use as
coin, that they are capable of this conversion.
W e shall now advert to some of the simplest forms
in which it may be supposed that paper credit will
first exist.
To speak first of Bills o f Exchange.
It is obvious, that, however portable gold may be
in comparison to any other article which might be
made a measure of value, to carry it in quantities to a
great distance must prove incommodious. Let it be
supposed, that there are in London ten manufacturers
who sell their article to ten shop-keepers in York, by
whom it is retailed; and that there are in York ten
manufacturers of another commodity, who sell it to ten
it, w ill always lead them to demand a much higher price than the pro­
duction o f it may have cost.
In Africa, for example, where the mode of barter prevails, the price
o f rice is at some times equal to about two pounds, and at others to
about sixteen pounds per ton. It cannot be supposed that the variations
in the crops o f different seasons can bear any proportion to this variation
o f prices. M onopoly also is an evil which is incident to trade as trade.
It is, indeed, mere particularly apt to exist in the infancy of commerce.
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shopkeepers in London. There would be no occasion
for the ten shopkeepers in London to send yearly to
York, guineas for the payment of the York manufac­
tures, and for the ten York shopkeepers to send yearly
as many guineas to London. It would only be ne­
cessary for the York manufacturers to receive from
each of the shopkeepers, at their own door, the money
in question (for we may assume a sufficient quantity
to be usually circulating in the place): giving in re­
turn letters which should acknowledge the receipt of
i t ; and which should also direct the money, lying
ready in the hands of their debtors in London, to be
paid to the London shopkeepers, so as to cancel the
debt in London in the same manner as that at York.
The expense and the risk of all transmission of money
would thus be saved; and the traders in question
would of course be, on the whole, enabled to sell
their article at a price proportionably lower than that
which they would otherwise require. Letters order­
ing the transfer of the debt, are termed, in the lan­
guage of the present day, bills of exchange. They
are bills by^ which the debt of one person is exchanged
for the debt of another ; and the debt, perhaps, which
is due in one place for the debt due in another.
To speak next of Promissory Notes.
W hen.goods are delivered in consideration of an
equivalent in money to be received at a subsequent
period, it becomes desirable that, for the sake of pre­
cisely recording the day on which payment is to be
made, and the exact amount of the sum, a note, ex­
pressing each of these particulars, should be given.
1 he term <e value received” is introduced into the
.note, as also into every bill of exchange; that ex­
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pression being deemed necessary in lavf to make the
bill or the note binding.
Bills of exchange and notes have been hitherto
considered as created only for those simple purposes
for which they seem originally to have been drawn,
and which are professed by the form always used in
drawing them. Both these sorts of paper must now
be spoken of as possessing an additional character,
namely, that of being Discountable Articles, or ar­
ticles which there is an opportunity of converting, at
any time, into m oney; such a discount or deduction
irom the amount of the bill or note as is equal to
the interest upon it, during the period for which it
has to run, being paid as the price of the conversion.
The bills of exchange, which were described as
drawn from York on London, and as serving to
transfer debts, would equally answer that purpose at
whatever date they might be payable. It is custo­
mary, however, to make almost all bills payable at a
period somewhat distant. Country bankers, for in­
stance, and shopkeepers, who often act in this re­
spect as bankers, indemnify themselves for the trouble
and expense attending the drawing of bills, not by a
commission, but by a protraction of the time at which
the bills are to become payable. Thus is created a
paper credit, which shall remain in existence for per­
haps one or more months, and may serve, during any
part of that time, as a discountable article.
Promissory notes were before represented as drawn
on the occasion of the sale of goods, and made pay­
able at a distant period. In returning to the more
careful consideration of them, we shall discover the
existence of the same disposition to multiply paper
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When a merchant in this country sells his goods
on credit, it is, perhaps, not very important to him
that he should receive from the buyer a promissorynote (or an accepted bill, which is the same thing),
if the only object of taking the note or bill is the
ascertainment of the exact amount of the debt, and
of the period of payment. It is true that the law
gives superior facility to the recovery of debts for
which promissory notes have been given. Never­
theless, if the sum be small, and the party in credit,
all these advantages, in the present high state of con­
fidence, would, in many cases, be thought scarcely to
compensate even the trifling expense of the note
stamp. The debt will be a book debt, if no note be
tak en ; and, as such, may be sufficiently secure.
Notes, even for goods sold and delivered, are there­
fore to be considered as given chiefly for the sake of
a convenience of another kind, which the seller finds
in having them. The note, like the bill ot exchange
just spoken of, is a discountable article. It may be
turned, if circumstances require, into money; or into
bank notes, which answer the same purpose. It is
not, perhaps, fully intended to turn the note or bill
into m oney; they are taken rather as a provision
against a contingency. The holder is rendered secure
against the effect of disappointments in the receipt
of cash. It is in this manner that his credit is forti­
fied, and that he is enabled to fulfil with punctuality
fits pecuniary engagements ; for there is a certain sort
and quantity of bills and notes, on the turning oi
which into money, at the common rate of discount,
the holder, if he be a man of credit, may almost as
confidently rely on the changing of a bank note into
guineas, or of a guinea into silver.
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The interest which traders have in being always
possessed of a number of notes and bills, has naturally
led to a great multiplication of them ; and not only to
the multiplication of notes given for goods sold, or
of regular bills of exchange, but to the creation of
numerous other notes and bills. O f these, some are
termed notes and bills of accommodation: and the
term fictitious is often applied to them. It may be
useful to describe them particularly.
It was before shewn, that the principal motive for
fabricating what must here be called the real note,
that is, the note drawn in consequence of a real sale
of goods, is the .wish to have the means of turning
it into money. The seller, therefore, who desires to
have a note for goods sold, may be considered as
taking occasion to ingraft on the transaction of the
sale, the convenient condition of receiving from the
buyer a discountable note of the same amount with
the value of the goods. A fictitious note, or note
of accommodation, is a note drawn for the same pur­
pose of being discounted; though it is not also sanc­
tioned by the circumstance of having been drawn in
consequence of an actual sale of goods. Notes of ac­
commodation are, indeed, of various kinds. The
following description of one may suffice:
A , being in want of 100/. requests B to accept a
note or bill drawn at two months, which B, therefore,
on the face of it, is bound to pay; it is understood,
however, that A will take care cither to discharge
the bill himself, or to furnish B with the means of
paying it. A obtains ready money for the bill on the
joint credit ot the two parties. A fulfils his promise
of paying it when due, and thus concludes the trans­
action. This service rendered by B to A is, how­
Federal Reserve Bank of St. Louis

ever, not unlikely to be requited at a more or less
distant period by a similar acceptance of a bill on A ,
drawn and discounted for B’s convenience.
Let us now compare such a bill with a real bill.
Let us consider in what points they differ, or seem
to differ; and in what they agree.
They agree, inasmuch as each is a discountable
article; each has also been created for the purpose of
being discounted; and each is, perhaps, discounted
in fact. Each, therefore, serves equally to supply
means of speculation to the merchant. So far, more­
over, as bills and notes constitute what is called the
circulating medium, or paper currency, of the coun­
try (a topic which shall not be here anticipated), and
prevent the use of guineas, the fictitious and the real
bill are upon an equality; and if the price of commo­
dities be raised in proportion to the quantity of paper
currency, the one contributes to that rise exactly in
the same manner as the other.
Before we come to the points in which they differ,
let us advert to one point in which they are commonly
supposed to be unlike ; but in which they cannot be
said always or necessarily to differ.
<c Real notes,” it is sometimes said, " represent
<c actual property. There are actual goods in ex<c istence, which are the counterpart to every real
<c note. Notes which are not drawn, in consequence
Ci of a sale of goods, are a species of false wealth,
if by which a nation is deceived. These supply only
an imaginary capital; the others indicate one that
“ is real.”
-h* answer to this statement it may be observed,
iIlsb that the notes given in consequence of a real
sale of goods cannot be considered as, on that account .
Federal Reserve Bank of St. Louis

certainly representing any actual property. Suppose
that A sells one hundred pounds worth of goods to
B at six months credit, and takes a bill at six months
for i t ; and that B, within a month after, sells the
same goods, at a like credit, to C, taking a like bill;
and again, that C, after another month, sells them to
D , taking a like bill, and so on. There may then,
at the end of six months, be six bills of 100/. each
existing at the same tim e ; and every one of these
may possibly have been discounted. O f all these
bills, then, one only represents any actual property.
In the next place it is obvious, that the number of
those bills which are given in consequence of sales
of goods, and which, nevertheless, do not represent
property, is liable to be increased through the ex­
tension of the length of credit given on the sale of
goods. If, for instance, we had supposed the credit
given to be a credit of twelve months instead of six,
1,200/. instead of 600/. would have been the amount
of the bills drawn on the occasion of the sale of
goods; and 1,100/. would have been the amount of
that part of these which would represent no property.
In order to justify the supposition that a real bill
(as it is called) represents actual property, there
ought to be some power in the bill-holder to prevent
the property which the bill represents, from being
turned to other purposes than that of paying the bill
in question.
No such power exists; neither the
man who holds the real bill, nor the man who dis­
counts it, has any property in the 'specific goods for
which it was given: he as much trusts to the general
ability to pay of the giver of the bill, as the holder of
any fictitious bill does. The fictitious bill may, in
many cases, be a bill given by a person having a large
Federal Reserve Bank of St. Louis


-rind known capital, a part of which the fictitious bill
may be said, in that case, to represent. The suppo­
sition that real bills represent property, and that fic­
titious bills do not, seems, therefore, to be one by
which more than justice is done to one of these spe­
cies of bibs, and something Jess than justice to the
come next to some points in which they
. ^ lrst> the fictitious note, or note of accommodation,
is liable to the objection that it professes to be what
lt is not. This objection, however, lies only against
those fictitious bills which are passed as real? In
many cases, it is sufficiently obvious what they are.
Secondly, the fictitious bill is, in general, less likely
to be punctually paid than the real one. There is a
general presumption, that the dealer in fictitious bills
is a man who is a more adventurous speculator than
he who carefully abstains from them.
It follows,
thirdly, that fictitious bills, besides being less safe,
are less subject to limitation as to their quantity. The
extent of a man’s actual'sales form some limit to the
amount of his real notes; and, as it is highly desirable
ln commerce that credit should be dealt out to all
persons in some sort of regular and due proportion,
the measure of a man’s actual sales, certified by the
^Ppearance of his bills drawn in virtue of those sales,
!s s°me rule in the case, though a very imperfect one
ln many respects.
A fictitious bill, or bill of accommodation, is eviently, in substance, the same as any common pro­
missory note; and even better, in this respect,— that
? re *S ^nt one security to the promissory note,
‘ I cass in the case of the bill of accommodation,
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there are two. So much jealousy subsists lest traders
should push their means of raising money too far,
that paper, the same in its general nature with that
which is given, being the only paper which can be
given, by men out of business, is deemed somewhat
discreditable when coming from a merchant. And
because such paper, when in the merchant’s hand,
necessarily imitates the paper which passes on the
occasion of a sale of goods, the epithet fictitious has
been cast upon it; an epithet which has seemed to
countenance the confused and mistaken notion, that
there is something altogether false and delusive in the
nature of a certain part both of the paper and of the
apparent wealth of the country.
Bills of exchange are drawn upon London to a
great amount, from all parts, not only of Great Britain,
but of the world; and the grounds on which they have
been drawn in a great degree elude observation. A
large proportion of them, no doubt partakes of the
nature of bills of accommodation. They have, how­
ever, in general, that shape communicated to them,
whatever it might be, which is thought likely to ren­
der them discountable; and it is not difficult, as the
preceding observations will have shewn, to make use*
of some real, and, at the same time, of many seeming,
transactions of commerce as a ground for drawing,
and as a means of multiplying such bills.
The practice of creating a paper credit, by drawing
and redrawing, has been particularly described by Dr
Adam Smith ; and is stated by him to have a tendency
which is very ruinous to the party resorting to it.
This practice, however, is often carried on at much
less expense to those engaged in it than Dr. Smith
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imagines. A, for instance, of London, draws a bill
at two months on B, of Amsterdam, and receives im­
mediate money’ for the bill. B enables himself to pay
the bill by drawing, when it is nearly due, a bill at
two months on A for the same sum, which bill he
sells or discounts; and A again finds the means of
payment by again drawing a bill, at two months, on
B. The transaction is, in substance, obviously the
same as if A and B had borrowed on their joint secu­
rity, the sum in question for six months. The ground
on which transactions of this sort have been stated by
Dr. Adam Smith to be ruinous is, that of the heavy
-expense of a commission on every bill drawn, which
is paid by him who raises money in this manner. If,
for instance, one half per cent, is the commission,
and the bills are drawn at two months, and a discount
of five per cent, per annum is paid, the money is
raised at an interest of eight per cent. Such transac­
tions, however, are often carried on alternately for the
benefit of each of the two parties; that is to say, at
one time the transaction is on the account of A, who
pays a commission to B; at another it is on the ac­
count ofB, who pays a commission to A. Thus each
party, on the whole, gains about as much as he pays
in the shape of such commissions; and the discount
in turning the bill into money, which is the same as
that on any other bill, may, therefore, be considered
as the whole expense incurred. Money may be
raised in this manner at an interest of only five per
cent. In the case recently proposed, the drawing and
re-drawing were imagined to be only between A, of
London, and B, of Amsterdam. This practice, how­
ever, is often carried on between three or more parties
drawing from three or more places. In such case,
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the draft is drawn on the place on which the existing
course of exchange shews that it will best answer to
draw it. An operation of this sort may obviously be
carried on partly for the purpose of raising money, and
partly for that of profiting by a small turn in the ex­
change. Transactions which are the converse to this,
are, on the other hand, entered into by those who hap­
pen to possess ready money. They remit, if the ex­
change seems to favour their remittance, and draw in
consequence of having remitted. To determine what
bills are fictitious, or bills of accommodation, and what
are real, is often a point of difficulty. Even the draw­
ers and remitters themselves frequently either do not
know, or do not take the trouble to reflect, whether
the bills ought more properly to be considered as of
the one class or of the o ther; and the private dis­
counter, or banker, to whom they are offered, still
more frequently finds the credit of the bills to be the
only rule which it is possible to follow in judging
whether he ought to discount them.
Federal Reserve Bank of St. Louis



O f circulating Paper. O f Bank Notes. O f Bills
considered as circulating Paper. Different Degrees
o f Rapidity in the Circulation o f different Sorts o f
circulating Medium, and o f the same Sort o f cir­
culating Medium at different Times. Error o f
D r. A. Smith. Difference in the Quantities wanted
fo r effecting the Payments o f a Country in Conse­
quence o f this Difference o f Rapidity. Proof o f
this taken from Events o f 1793. Fallacy involved
in the Supposition that Paper Credit might be abo­
E proceed next to Speak of circulating paper,
and first of Notes payable to Beared on De­
mand, whether issued by a public bank or by a private
W hen confidence rises to a certain height in a
country, it occurs to some persons, that profit may
be obtained by issuing notes, which purport to be

Federal Reserve Bank of St. Louis

exchangeable for money; and which, through the
known facility of thus exchanging them, may circulate
in its stead; a part only of the money, of which the
notes supply the place, being kept in store as a pro­
vision for the current payments. On the remainder
interest is gained, and this interest constitutes the
profit of the issuer. Some powerful and well accre­
dited company will probably be the first issuers of
paper of this sort, the numerous proprietors of the
company exerting their influence, for the sake of the
dividends which they expect, in giving currency to
the new paper credit. The establishment of a great
public bank has a tendency to promote the institution
of private banks. The public bank, obliged to pro­
vide itself largely with money for its own payments,
becomes a reservoir of gold to which private banks
may resort with little difficulty, expense, or delay, for
the supply of their several necessities.
Dr. A. Smith, in his chapter on Paper Credit, con­
siders the national stock of money in the same light
with those machines and instruments of trade which
require a certain expense, first, to erect, and after­
wards to support them. And he proceeds to observe,
that the substitution of paper, in the room of gold
and silver coin, serves to replace a very expensive
instrument of commerce with one much less costly,
and sometimes equally convenient.
“ Thus,” he
says, “ a banker, by issuing 100,000/. in notes, keep<c ing 20,000/. in hand for his current payments, causes
“ 20,000/. in gold and silver to perform all the functions which 100,000/. would otherwise have periC formed ; in consequence of which, 80,000/. of gold
“ and silver can be spared, which will not fail to be
" exchanged for foreign goods, and become a new
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u fund for a new trade, producing profit to the coun" t r y .”*
Dr. Smith, although he discusses at some length
the subject of Paper Circulation, does not at all ad­
vert to the tendency of bills of exchange to spare the
use of bank paper, or to their faculty of supplying its
place in many cases.
In the former chapter it was shewn that bills,
though professedly drawn for the purpose of ex­
changing a debt due to one person for a debt due to
another, are, in fact, created rather for the sake of
serving as a discountable article, and of forming a
provision against contingencies; and that, by being
at any time convertible into cash (that is, into either
money or bank notes) they render that supply of cash
which is necessary to be kept in store much less con­
But they not only spare the use of ready money;
they also occupy its place in many cases. Let us
imagine a farmer in the country to discharge a debt
* Dr. Smith, in confirmation o f this, remarks how greatly Scotland
had been enriched in the twenty-five or thirty years preceding the time at
which he wrote, by the erection o f new banks in almost every conside­
rable town, and even in some country villages, the effects having been,
as he affirms, precisely those which he had described. T he trade of
Glasgow he states to have been doubled in about fifteen years after the
erection of its first bank, and the trade o f Scotland to be thought to have
been more than quadrupled since the first erection of its two first public
banking companies. T his effect, indeed, he conceives to be too great to
be accounted for by that cause alone j though he deems it indisputable,
that the banks have essentially contributed to the augmentation o f the
trade and industry o f Scotland. T he gold and silver of Scotland, circu­
lating before the union, is estimated by him at full a million ; the quan­
tity since the union at less than half a million j and the paper circulating
in Scotland since the union at about one million and a half.
Federal Reserve Bank of St. Louis


of 10/. to his neighbouring grocer, by giving to him
a bill for. that sum, drawn on his corn factor in Lon­
don for grain sold in the metropolis; and the grocer
to transmit the bill, he having previously endorsed it,
to a neighbouring sugar-baker, in discharge of a like
debt; and the sugar-baker to send it, when again en­
dorsed, to a W est India merchant in an out port, and
the West India merchant to deliver it to his country
banker, who also endorses it, and sends it into further
circulation. The bill in this case will have effected
five payments exactly as if it were a 10/. note payable
to bearer on demand. It will, however, have circu­
lated in consequence chiefly of the confidence placed
by each receiver of it in the last endorser, his own
correspondent in trade; whereas, the circulation of a
bank note is owing rather to the circumstance of the
name of the issuer being so well known as to give to
it an universal credit. A multitude of bills pass be­
tween trader and trader in the country in the manner
which has been described; and they evidently form,
in the strictest sense, a part of the circulating medium
of the kingdom.*
* M r. Boyd, in his publication addressed to M r. Pitt on the Subject
o f the Bank o f England Issues, propagates the same error into which
many others have fallen, o f considering bills as no part of the circulating
medium o f the country. He says, “ by the words means of circulation,”
“ circulating medium,” and “ currency,” u (which are used as synony“ mous terms in this Ittter) I understand always ready money, whether
“ consisting of bank notes or specie, in contradiction to bills o f exchange,
“ naval bills, exchequer bills, or any negotiable paper which form no part
“ e f the circulating medium, as I have always understood that term.
*« The latter is the circulator; the former are merely objects o i circula« tion.” See note to the first p3ge of M r. Boyd’s letter to M r. Pitt.
It will be seen, in the progress o f this work, that it was necessary to
ilear away much confusion which has arisen from the want o f a suffici-
Federal Reserve Bank of St. Louis


Bills, however, and especially those which are
drawn for large sums, may be considered as in general
circulating more slowly than either gold or bank notes,
and for a reason which it is material to explain. Bank
notes, though they yield an interest to the issuer, af­
ford none to the man who detains them in his posses­
sion j they are to him as unproductive as guineas. The
possessor of a bank note, therefore, makes haste to
part with it. The possessor of a bill of exchange pos­
sesses, on the contrary, that which is always growing
more valuable. The bill, when it is first drawn, is
worth something less than a bank note, on account of
its not being due until a distant day; and the first re­
ceiver of it may be supposed to obtain a compensation
for the inferiority of its value in the price of the article
with which the bill is purchased. W hen he parts with
it, he may be considered as granting to the next re­
ceiver a like compensation, which is proportionate to
the time which the bill has still to run. Each holder
of a bill has, therefore, an interest in detaining it.
Bills, it is true, generally pass among traders in the
country without there being any calculation or regu­
lar allowance of discount; the reason of which circum­
stance is, that there is a generally understood period
of time for which those bills may have to run, which,
according to the custom of traders, are accepted as
current payment. If any bill given in payment has a
longer time than usual to run, he who receives it is
considered as so far favouring the person from whom
he takes i t ; and the favoured person has to eompencntly full acquaintance with the several kinds of paper credit ; and, in
particular, to remove, by a considerable detail, the prevailing errors re­
specting the nature of bills, before it could be possible to reason properly
upon the effects of paper credit,

Federal Reserve Bank of St. Louis


sate for this advantage, not, perhaps, by a recompence
of the same kind accurately calculated, but in the ge­
neral adjustment of the pecuniary affairs of the two
This quality in bills of exchange (and it might be
addsd of interest notes, &c.) of occupying the place of
bank paper, and of also throwing the interest accruing
during their detention into the pocket of the holder,
contributes greatly to the use of them. The whole
trading world may be considered as having an interest
in encouraging them. To possess some article which,
so long as it is detained, shall produce a regular in­
terest, which shall be subject to no fluctuations in
price, which, by the custom of commerce, shall pass
in certain cases as a payment, and shall likewise be
convertible into ready money by the sacrifice of a small
discount, is the true policy of the merchant. Goods
will not serve this purpose, because they do not grow
more valuable by detention; nor stocks, because,
though they yield an interest, they fluctuate much in
value ; and, also, because the expense of brokerage is
incurred in selling them, not to mention the inconve­
niences arising from the circumstance of their being
transferable only in the books of the Bank of England.
Stocks, however, by being at all times a saleable and
ready money article, are, to a certain degree, held by
persons in London on the same principle as bills, and
serve, therefore, in some measure, like bills, if we
consider these as a discountable article, to spare the
use of bank notes. Exchequer bills will not fully an­
swer the purpose, because there is a commission on
the sale of these, as on the sale of stocks; and because,
not to speak of some other inferior objections to them,
they fluctuate, in some small degree, in price.
Federal Reserve Bank of St. Louis


Bills, since they circulate chiefly among the trading
world, come little under the observation of the public.
The amount of bills in existence may yet, perhaps, be
at all times greater than the amount of all the bank
notes of every kind, and of all the circulating guineas.*
The amount of what is called the circulating me­
dium of a country has been supposed by some to bear
a regular proportion to the quantity of trade and of
payments. It has, however, been shewn, that such
part of the circulating medium as yields an interest to
the holder will effect much fewer payments, in pro­
portion to its amount, than the part which yields to
the holder no interest. A number of country bank
notes, amounting to 100/. may, for instance, effect on
an average one payment in three days; while a bill of
ICO/, may, through the disposition of each holder to'
detain it, effect only one payment in nine days.
There is a passage in the work of Dr. Adam Smith
which serves to inculcate the error of which I have
been speaking $ a passage on which it may be useful
to comment with some particularity.
He says, ££The whole paper money of every kind
“ which can easily circulate in any country, never can
££ exceed the value of the gold and silver of which it
<c supplies the place, or which (the commerce being
“ supposed the same) would circulate there, if there
:c was no paper money.”

/ * Liverpool and Manchester effect the whole o f their larger mercantile
payments not by country bank notes, o f which none are issued by the
hanks of those places, but by bills at one or two mouths date, drawn on
London. The bills annually drawn by the banks of each e f those towns
amount to many m illions. T he banks obtain a small commission on these

Federal Reserve Bank of St. Louis


Does Dr. Smith m^an to include, in his idea of “ the
“ whole paper money of every kind which can easily
“ circulate,” ¿ill the bills of exchange of a country,
or does he not? And does he also include interest
notes, exchequer bills, and India bonds, and those
other articles which very much resemble bills of ex­
change? In an earlier part of his chapter, he has this
observation : “ There are different sorts of paper mo“ ney; but the circulating notes of banks and bank“ ers are the species which is best known, and which
“ seems best adapted for this purpose.” We are led
to judge by this passage, and also by the term “ paper
“ money of every kind” in the passage before quoted,
that it was his purpose to include bills of exchange;
on the other hand, if all the bills of exchange of a
country are to be added to the bank notes which cir­
culate, it becomes then so manifest, that the whole of
the paper must be more than equal to the amount of
the money which would circulate if there were no
paper, that we feel surprised that the erroneousness
of the position did not strike Dr. Smith himself. He
introduces, indeed, the qualifying word “ easily;” he
speaks of “ the whole paper money of every kind
“ which can easily circulate.” But this term, as I
apprehend, is meant only to refer to an easy, in con­
tradistinction, to a forced, paper circulation; for it is
on the subject of a forced circulation that a great part
of his observations turn. He seems, on the other
hand, to have paid no regard to the distinction on
which I have dwelt, of a more slow and a more rapid
circulation; a thing which is quite different from an
easy and a difficult circulation. He appears, in short,
not at all to have reflected how false his maxim is ren­
dered (if laid down in the terms which he has used)
Federal Reserve Bank of St. Louis


both by the different degrees of rapidity of circulation
which generally belong to the two different classes of
paper of which I have spoken, and also by the diffe­
rent degrees of rapidity which may likewise belong
to the circulation of the same kinds of paper, and even
of the same guineas, at different times.
The error of Dr. Smith, then, is this :—he repre­
sents the whole paper, which can easily circulate
when there are no guineas, to be the same in quan­
tity with the guineas which would circulate if there
were no paper ; whereas, it is the quantity not o f cc the
ff thing which circulates,” that is, of the thing which
is capable o f circulation, but of the actual circulation
which should rather be spoken of as the same in both
cases. The quantity of circulating paper, that is, of
paper capable of circulation, may be great, and yet the
quantity of actual circulation may be small, or vice
versa. The same note may either effect ten payments
in one day, or one payment in ten days; and one note,
therefore, will effect the same payments in the one
case, which it would require a hundred notes to effect
in the other.
I have spoken of the different degrees of rapidity in
the circulation of different kinds of paper, and of the
consequent difference of the quantity of each which is
wanted in order to effect the same payments. I shall
speak next of the different degrees of rapidity in the
circulation of the same medium at different times: and,
first, of bank notes.
The causes which lead to a variation in the rapidity
of the circulation of bank notes may be several. In
general, it may be observed, that a high state of con­
fidence serves to quicken their circulation; and this
happens upon a principal which shall be fully ex­
Federal Reserve Bank of St. Louis


plained. It must be premised, that by the phrase a
more or less quick circulation of notes, will be meant
a more or less quick circulation of the whole of them
on an average. Whatever increases that reserve, for
instance, of Bank of England notes which remains in
the drawer of the London banker as his provision against contingencies, contributes to what will here be
termed the less quick circulation of the whole. Now
a high state of confidence contributes to make men
provide less amply against contingencies. A t such a
time, they trust, that if the demand upon them for a
payment, which is now doubtful and contingent,
should actually be made, they shall be able to provide
for it at the moment; and they are loth to be at the
expense of selling an article, or of getting a bill dis­
counted, in order to make the provision much before
the period at which it shall be wanted. When, on
the contrary, a season of distrust arises, "prudence
suggests, that the loss of interest arising from a de­
tention of notes for a few additional days should not
be regarded.
It is well knowm that guineas are hoarded, in times
of alarm, on this principle. Notes, it is true, are not
hoarded to the same extent *, partly because notes are
not supposed equally likely, in the event of any gene­
ral confusion, to find their value, and partly because
the class of persons who are the holders of notes is
less subject to weak and extravagant alarms. In dif­
ficult times, however, the disposition to hoard, or ra­
ther to be largely provided with Bank of England
notes, will perhaps, prevail in no inconsiderable degree.
This remark has been applied to Bank of England
notes, because these are always in high credit; and it
ought, perhaps, to be chiefly confined to these. They
Federal Reserve Bank of St. Louis

constitute the coin in which the great mercantile pay­
ments in London, which are payments on account of
the whole country, are effected. Jf, therefore, a dif­
ficulty in converting bills of exchange into notes is
apprehended, the effect both on bankers, merchants,
and tradesmen, is somewhat the same as the effect of
an apprehension entertained by the lower class of a
difficulty in converting Bank of England notes or
bankers’ notes into guineas. The apprehension oi
the approaching difficulty makes men eager to do that
to-day, which otherwise they would do to-morrow.
The truth of this observation, as applied to Bank
of England notes, as well as the importance of at­
tending to it, may be made manifest by adverting to
the events of the year 1793, when, through the failure
of many country banks, much general distrust took
place. The alarm, the first material one of the kind
which had for a long time happened, was extremely
great. It does not appear that the Bank of England
notes, at that time in circulation, were fewer than
usual. It is certain, however, that the existing num ­
ber became, at the period of apprehension, insufficient
for giving punctuality to the payments ot the metro­
polis ; and it is not to be doubted, that the insufficien­
cy must have arisen, in some measure, from that slow­
ness in the circulation of notes, naturally attending an
alarm, which has been just described. Every one
fearing lest he should not have his notes ready wffien
the day of payment should come, would endeavour to
provide himself with them somewhat beforehand. A
few merchants, from a natural though hurtful timidi­
ty» would keep in their own hands some of those
notes, which, in other times, they would have lodged
with their bankers 5 and the effect would be, to cause
Federal Reserve Bank of St. Louis


the same quantity of bank paper to transact fewer
payments, or, in other words, to lessen the rapidity
of the circulation of notes on the whole, and thus to
increase the number of notes wanted. Probably, also,
some Bank of England paper would be used as a sub­
stitute for country bank notes suppressed.
The success of the remedy which the parliament
administered, denotes what was the nature of the evil.
A loan of exchequer bills was directed to be made to
as many mercantile persons, giving proper security,
as should apply. It is a fact, worthy of serious atten­
tion, that the failures abated greatly, and mercantile
credit began to be restored, not at the period when
the exchequer bills were actually delivered, but at a
time antecedent to that a:ra. It also deserves notice,
that though the failures had originated in an extraor­
dinary demand for guineas, it was not any supply of
gold which effected the cure. That fear of not being
able to obtain guineas, which arose in the country,
led, in its consequences, to an extraordinary demand
for bank notes in London; and the want of bank notes
in London became, after a time, the chief evil. The
very expectation of a supply of exchequer bills, that
is, of a supply of an article which almost any trader
might obtain, and which it was known that he might
then sell, and thus turn into bank notes, and after
turning into bank notes might also convert into gui­
neas, created an idea of general solvency. This ex­
pectation cured, in the first instance, the distress of
London, and it then lessened the demand for guineas
in the country, through that punctuality in effecting
the London payments which it produced, and the
universal confidence which it thus inspired. The sum
permitted by parliament to be advanced in exchequer
Federal Reserve Bank of St. Louis

bills was five millions, of which not one half was taken.
O f the sum taken, no part was lost. On the contrary,
the small compensation, or extra interest, which was
paid to government for lending its credit (for it was
mere credit, and not either money or bank notes that
the government advanced), amounted to something
more than was necessary to defray the charges, and a
small balance of profit accrued to the public. For
this seasonable interference, a measure at first not
well understood and opposed at the time, chiefly on
the ground of constitutional jealousy, the mercantile
as well as the manufacturing interests of the country
were certainly much indebted to the parliament, and
to the government.* *
That a state of distrust causes a slowness in the cir­
culation of guineas, and that at such a time a greater

* The commissioners named in the act state in their report, “ that the
“ knowledge that loans might have been obtained, sufficed, in several in“ stances, to render them unnecessary; that the whole number o f applications was three hundred and thirty-tw o, for sums amounting to
**¡£•3)855,624; of which two hundred and thirty-eight were granted,
“ amounting to ,£ .2,202,000; forty-five for sums to the amount o f
“ £.1 ,2 1 5 ,1 0 0 were withdrawn ; and foity-nine were rejected for various
*« reasons. That the whole sum advanced on loans was paid, a consi“ derable part before it was due, and the remainder regularly at the stated
“ periods, without apparent difficulty or distress.”
T hey observe that, “ the advantages of this measure were evinced by
*c a speedy restoration of confidence in mercantile transactions, which pro“ duced a facility in raising money that was presently felt, not only in
“ the metropolis, but through the whole extent o f Great Britain. Nor
** was the operation o f the act less beneficial with respect to a variety o f
“ eminent manufacturers, who, h a v in g in a great degree suspended their
“ w o rk s, were enabled to resume them, and to afford employment to a
** number o f workmen who must otherwise have been thrown on the

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quantity of money will be wanted in order to effect
only the same money payments, is a position which
scarcely needs to be proved. Some observations, how­
ever, on this subject may not be useless. When a
season of extraordinary alarm arises, and the money of
the country in some measure disappears, the guineas,
it is commonly said, are hoarded. In a certain degree
this assertion may be literally true. But the scarcity
of gold probably results chiefly from the circumstance
of a considerable variety of persons, country bankers,
shopkeepers, and others, augmenting, some in a
smaller and some in a more ample measure, that sup­
ply which it had been customary to keep by them.
The stock thus enlarged is not a fund which its pos­
sessor purposes, in no case, to diminish, but a fund
which, if he has occasion to lessen it, he endeavours,
as he has opportunity, to replace. It is thus that a
more slow circulation of guineas is occasioned: and
the slower the circulation, the greater the quantity
wanted, in order to effect the same number of money
Thus, then, it appears, that the sentiment which
Dr. Smith leads his readers to entertain, namely,
that there is in every country a certain fixed quantity
of paper, supplying the place of gold, which is all
that “ can easily circulate” (or circulate without being
forced into circulation), and which is all (for such,
likewise, seems to be the intended inference) that
should ever be allowed to be sent into circulation, is,
in a variety of respects, incorrect. The existence of
various hoards of gold in the coffers of bankers, and
of the Bank of England, while there are no corres­
ponding hoards of paper, would of itself forbid any
thing like accurate comparison between them. Many
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additional, though smaller, circumstances might be
mentioned as contributing to prevent the quantity of
notes which will circulate from being the same as the
quantity of gold which would circulate if there were
no notes; such as their superior convenience in a va­
riety of respects, the facility of sending them by post,
the faculty which they have of being either used as
guineas, or of supplying the place of bills of exchange,
and furnishing a remittance to distant places.
There is a further objection to the same remark of
Dr. Smith. It would lead an uninformed person to
conceive, that the trade of a country, and of this coun­
try in particular, circumstanced as it now is, might
be carried on altogether by guineas, if bank notes
of all kinds were by any means annihilated. It may
already have occurred, that if bank paper were abo­
lished, a substitute for it would be likely to be found, to
a certain degree, in bills of exchange; and that these,
on account of their slower circulation, must, in that
case, be much larger in amount than the notes of
which they would take the place. But further; if
bills and bank notes were extinguished, other substi­
tutes than gold would unquestionably be found. R e­
course would be had to devices of various kinds by
which men would save themselves the trouble of
counting, weighing, and transporting guineas, in all
the larger operations of commerce, so that the amount
ot guineas brought into use would not at all corres­
pond with the amount of the bills and notes suppres­
sed. Banks would be instituted, not of the descrip­
tion which now exist, but of that kind and number
which should serve best to spare both the trouble of
g°ld, and the expense incurred by the loss of interest
uPon the quantity of it in possession. Merely by
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the transfer of the debts of one merchant to another,
in the books of the banker, a large portion of what
are termed cash payments is effected at this time
without the use of any bank paper,* and a much
larger sum would be thus transferred, if guineas were
the only circulating medium of the country. Credit
would still ex ist; credit in books, credit depending
on the testimony of witnesses, or on the mere verbal
promise of parties. It might not be paper credit;
but still it might be such credit as would spare more
or less, the use of guineas. It might be credit of a
worse kind, less accurately dealt out in proportion to
the desert of different persons, and therefore, in some
instances, at least, still more extended; it might be
credit less contributing to punctuality of payments,
and to the due fulfilment of engagements; less con­

* The following custom, now prevailing among the bankers within the
city of London, may serve to illustrate this observation, and also to shew
the strength of the disposition which exists in those who are not the issu­
ers of bank notes to spare the use both o f paper and guineas.

It is the

practice o f each of these bankers to send a clerk, at an agreed hour in the
afternoon, to a room provided for their use. Each clerk there exchanges
the drafts on other bankers received at his own house, for the drafts on his
own house received at the house of other bankers. T he balances o f the
several bankers are transferred in the same room from otie to another, in
a manner which it is unnecessary to explain in detail, and the several ba­
lances are finally wound up by each clerk into one balance. The diffe­
rence between the whole sum which each banker has to pay to all other
city bankers, and the whole sum which he has to receive of all other city
bankers, is, therefore, all that is discharged in bank notes or money j a
difference «much less in its amount than the se v era l differences would be
equal to. T his device, which serves to spare the use of bank notes, may
suggest the practicability of a great variety o f contrivances for sparing the
use o f gold, to which men having confidence in each other would naturally
resort, if we could suppose bank paper to be abolished.
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ducive to the interests of trade, and to the cheapen­
ing of articles j and it would, perhaps, also be credit
quite as liable to interruption on the occasion of any
sudden alarm or material change in the commercial
prospects and circumstances of the country.
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Observations o f Dr. Smith respecting the Bank o f Eng­
land. O f the Natui'e o f that Institution. Reasons
fo r never greatly diminishing its Notes. Its lia b i­
lity to be exhausted o f Guineas. The Suspension
o f its Cash Payments not owing to too great Issue
o f Paper, nor to too great Loans. Propriety o f
parliamentary Interference.
R. Adam Smith, after laying down the principle
which has been lately animadverted on, “ that
“ the quantity of paper which can easily circulate in
“ a country never can exceed the gold and silver
" which would circulate if there were no paper,” pro­
ceeds to observe, that the Bank of England, “ by issu“ ing too great a quantity of paper, of which the ex“ cess was continually returning, in order to be ex“ changed for gold and silver, was, for many years to“ gether, obliged to coin gold to the extent of between

Federal Reserve Bank of St. Louis


u eight hundred thousand pounds and a million a year,
“ For this great coinage the bank was frequently
“ obliged to purchase gold bullion at 4/. an ounce,
“ which it soon after issued in coin at 3/. 17i. 10.1d.
<f an ounce, losing two and a half and three per cent.
“ on the coinage.” Dr Smith probably could not be
acquainted with the secret of the actual quantity of
those bank notes, of the number of which he com­
plains ; he must, therefore, have taken it for granted,
that they were what he terms excessive, on the
ground of the price of gold being high, and the coin­
age great. H e does not proced, in any respect, to
guard or to limit the observation in question ; an ob­
servation which, when thus unqualified, may lead the
reader to suppose, that whenever the bank finds itself
subjected to any great demand for gold inconsequence
of a high price of bullion, the cause of this evil is an
excess of circulating paper, and the remedy a reduc­
tion of bank notes. There is also danger, lest it
should be conceived, that if the remedy should appear
to fail, it can fail only because the reduction is not suf­
ficiently great.
The point of wh ich we are speaking is of great im­
portance, and will be the subject of much future dis­
cussion. One object of the present and succeeding
Chapter will be to shew, that, however just may be
the principle of Dr. Smith when properly limited and
explained, the reduction of the quantity of Bank of
England paper is by no means a measure which ought
to be resorted to on the occasion of every demand
upon the bank for guineas arising from the high price
of bullion, and that such reduction may even aggra­
vate that sort of rise which is caused by an ala'rn in
the country.
Federal Reserve Bank of St. Louis

I t will be proper, first, to describe the nature of
the institution of the Bank of England, and the rela­
tion in which it stands to the public ; in this detail,
the event of the late stoppage of its cash payments
will be particularly noticed.
Bills are drawn on London from every quarter of
the kingdom, and remittances are sent to the metro­
polis to provide for them, while London draws no
bills, or next to none, upon the country. London is,
in this respect, to the whole island, in some degree,
what the centre of a city is to the suburbs. The tra­
ders may dwell in the suburbs, and lodge many goods
there, and they may carry on at home a variety of
smaller payments, while their chief cash account is
with the banker, who fixes his residence among the
other bankers, in the heart of the city. London also
is become, especially of late, the trading metropolis
of Europe, and, indeed of the whole world ; the fo­
reign drafts, on account of merchants living in our
out-ports and other trading towns, and carrying on
business there, being made, with scarcely any excep­
tions, payable in London. The metropolis, moreover,
through the extent of its own commerce, and the
greatness of its wealth and population, has immense
receipts and payments on its own account; and the
circumstance of its being the seat of government, and
the place where the public dividends are paid, serves
to increase its pecuniary transactions. The practice,
indeed, of transferring the payments of the country to
London being once begun, was likely to extend itself.
For, in proportion as the amount and number of pay­
ments and receipts is augmented in any one particular
place, the business of paying and receiving is more
easily and cheaply transacted, the necessary guineas
Federal Reserve Bank of St. Louis

becoming fewer in proportion to the sums to be re»
ceived and paid, and the bank notes wanted, though
increasing on the whole, becoming fewer in propor­
tion also. On the punctuality with which the accus­
tomed payments of London are effected, depends,
therefore, most essentially the whole commercial cre­
dit of Great Britain. The larger London payments
are effected exclusively through the paper of the
Bank of England; for the superiority of its credit is
such, that, by common agreement among the bankers,
whose practice, in this respect, almost invariably
guides that of other persons, no note of a private
house will pass in payment as a paper circulation in
The bank has a capital of near twelve millions, to
which it has added near four millions of undivided
, profits or savings: all this capital and savings must be
lost before the creditors can sustain any loss.
The bank of England is quite independent of the
executive government. It has an interest, undoubt­
edly (of the same kind with that of many private in­
dividuals), in the maintenance of our financial as well
as commercial credit. It is also in the habit of lend­
ing out a large portion of its ample funds on govern­
ment securities of various kinds, a comparatively small
part only, though a sum not small in itself, being lent
to the merchants in the way of discount. The ground
on which the bank lends so much to government is
clearly that of mutual convenience, as well as long hahit. It is the only lender in the country on a large
scale; the government is the only borrower on a scale
equally extended; and the two parties, like two whole­
sale traders in a town, the one the only great buyer,
and the other the only great seller of the same article*
Federal Reserve Bank of St. Louis

naturally deal much with each other, and have compa­
ratively small transactions with those who carry on
only a more contracted business. The bank, more­
over, in time of peace, is much benefited by lending
to government. It naturally, therefore, continues
those loans, during war, which it had been used to
grant at all antecedent periods. It occasionally fur­
nishes a considerable sum to the East India company.
If, indeed, it lent more to the merchants during war,
and less to the government, the difference would not
be so great as might, perhaps, at first view be sup­
posed. If, for instance, it furnished a smaller sum
on the security of exchequer bills, that article might
then be supposed to fall in price, or, in other words,
to yield a higher and more tempting interest; and the
bankers, in that case, would buy more exchequer
bills, and would grant less aid to the merchants; they
would, at least, in some degree, take up whichever
trade the Bank of England should relinquish. The
preference given by the bank to the government se­
curities, is, therefore, no symptom of a want of in­
dependence in its directors: they are subject, in a
much greater degree, to their own proprietors than
to any administration. The strong manner in which
the directors of the bank * at the time antecedent to
the suspension of their cash payments, insisted on
having four millions and a half paid up to them by the
government—a payment which, though demanded at
a very inconvenient time, was accordingly made—may
be mentioned as one sufficiently striking mark of the
* See the correspondence of the bank on this subje&, in the Appendix
to the Report o f the House o f Commons resptftin^ the order o f council
for authorising the suspension of the cash payments o f the bank.
Federal Reserve Bank of St. Louis


independence of that company. There is, however,
another much more important circumstance to be no­
ticed, which is conclusive on this subject. The go­
vernment of Great Britain is under little or no tempt­
ation either to dictate to the Bank of England, or to
lean upon it in any way which is inconvenient or dan­
gerous to the bank itself. The minister has been able
to raise annually, without the smallest difficulty, by
means of our funding system, the sum of no less than
between twenty and thirty millions. The govern­
ment, therefore, is always able to lessen, by a loan
from the public, if it should be deemed necessary, the
amount of its debt running with the bank. To sup­
pose that bank notes are issued to excess, with a view
to furnish means of lending money to the minister, is,
in a high degree, unreasonable. The utmost sum
which he could hope to gain in the way of loan from
the bank, by means of an extraordinary issue of bank
notes, could hardly be more than four or five millions;
and it is not easy to believe, that a government which
can raise at once twenty or thirty millions, will be
likely, for the sake of only four or five millions (for
the loan of which it must pay nearly the same interest
as for a loan from the public), to derange the system,
distress the credit, or endanger the safety of the Bank
of England.* This banking company differs in this
most important point from every one of those national
banks, which issue paper, on the continent. I un­
derstand that the banks of Petersburg?), Copenhagen,
Stockholm, Vienna, Madrid, and Lisbon, each of
which issues circulating notes, which pass as cur­



T he
remark has been
by Sir Francis Baring,
Federal Reserve Bank of St. Louis

made in a short pamphlet lately published

rent payment, are all in the most direct and strict
sense government banks.* It is also well known,
that the governments residing in these several places
have not those easy means of raising money, bv a loan
from the people, which the minister of Great Britain
so remarkably possesses. Those governments, there­
fore, have, in times even of moderate difficulty, no
other resource than that of extending the issue of the
paper of their own banks; which extension of issue
naturally produces a nearly correspondent depreciation
of the value of the notes, and a fall in the exchange
with other countries, if computed at the paper price.
The notes, moreover, being once thus depreciated,
the government, even supposing its embarrassments
to cease, is seldom disposed to bring them back to their
former limits, to do which implies some sacrifice on
their part at the time of effecting the reduction ; but
it contents itself, perhaps, with either a little lessen­

* T he bank o f Amsterdam did not issue circulating notes, but was a
mere bank for deposits, the whole of which it was supposed by some to
keep always in specie. It was discovered, however, when the French
possessed themselves o f Holland, that it had been used privately to lend
a certain part o f them to the city o f Amsierdam, and a part to the old
Dutch government. These loans ought certainly rather to have been
furnished in that open manner in which those of our bank are made.
Neither o f the two debts, as I understand, have yet been discharged. The
bank of Amsterdam had no capital o f its own.
In wha.ever way we may suppose the property of the bank o f Am ster­
dam, or that of any other public bank or private individual, to be em ­
ployed, it is not easy to imagine that it can altogether escape the hands
o f a needy and successful invader. I f the property of a public bank is
kept in money, a rapacious enemy may seize that money. I f lent to the
merchants, the enemy, by their requisitions, may draw it from the mer­
chants j and by thus incapacitating the merchants to pay their debts to
the bank, may cause the failure of the bank.
Federal Reserve Bank of St. Louis


ing, or with not further adding to, the evil. The ex­
pectation of the people on the continent, therefore,
generally is, that the paper, which is falling in value,
will, in better times, only cease to fall, or, if it rises,
will experience only an immaterial rise, and this ex­
pectation serves of course to accelerate its fall. Hence
it has happened, that in all the places of Europe, of
which mention has been made, there exists a great
and established, and, generally, an increasing discount
or agio between the current coin and the paper mo­
ney of the kingdom. Nor, indeed, is this a ll: several
of the governments of Europe have not only extended
their paper in the manner which has been described,
but have, besides this, depreciated, from time to time,
their very coin; and thus there has been a two-fold
cause for a rise in the nominal price of their commo­
dities when exchanged with the current paper. There
is, therefore, a fundamental difference between' the
nature of the paper of the Bank of England, and that
of all the national or government banks on the conti­
nent. No one supposes that the English guinea con­
tains less and less gold than heretofore, through frauds
practised by government in the coinage; and as
little is it to be suspected that the Bank of England
paper is about to be depreciated by an excessive issue
either ordered or needed by the government. There is,
moreover, at present, this further ground for assuming
that the issue of Bank of England notes is not likely
to be excessive,—that it has lately become a practice
to make the number of them public. Their quan­
tity, as it now appears, has never, in any short time,
varied very greatly; has seldom, in late years, been
below ten or eleven millions, even when no one pound
and two pound notes were issued; and has at no mo
Federal Reserve Bank of St. Louis


nient exceeded the sum of about fifteen millions and
a half, including two millions and a half of one pound
and two pound notes. It is not impossible that the
discredit into which the paper of the government
banks of the continent of Europe has fallen, into
which also the paper of the American banks sunk at
the time of the American war, through the same ex­
tension of its issues by the then American govern­
ment ; and also that the total annihilation of the paper
issued by the successive French revolutionary govern­
ments, may have, in some degree, contributed, though
most unjustly, to that fall in the exchange which G reat
Britain has experienced. Foreigners not adverting to
that independence of the Bank of England, the
grounds ol which have been stated, and misled pos­
sibly by the abundant misrepresentations which have
taken place in this country, may have thought that it
was the government which, by its loans, involved the
bank in difficulties, (a point which shall be discussed
presently), and that the bank is merely an instrument
in the hands of the government; an instrument which
may be turned, as the government banks on the con­
tinent have been, to the purpose of issuing notes to
an extravagant extent. If such should, in any degree,
be their sentiment, it would be just in them to infer
from thence, that the Bank of England notes are not
unlikely to fall in their value in the same manner as
the notes of the continental banks. An unwillingness
to leave in this country whatever sums they may have
a right to draw from us (sums probably small in the
whole) may have been the consequence of this fear,
and a great unwillingness to trust with us even a small
quantity of property, may happen to cause, under
Federal Reserve Bank of St. Louis


certain circumstances, a considerable fall in the ex­
It may be mentioned as an additional ground of con­
fidence in the Bank o f‘England, and as a circumstance
of importance in many respects, that the numerous
proprietors who chuse the directors, and have the
power of controlling them (a power of which they
have prudently forborne to make any frequent use),
are men whose general stake in the country far ex­
ceeds that particular one which they have in the stock
of the company. They are men, therefore, who feel
themselves to be most deeply interested not merely in
the increase of the dividends or in the maintenance
of the credit of the Bank of England, but in the support
of commercial as well as of public credit in general.
There is, indeed, both among them and among the
whole commercial world, who make so large a por*tion of this country, a remarkable determination to
sustain credit, and especially the credit of the bank;
and this general agreement to support the bank is one
of the pillars of its strength, and one pledge of its
safety. The proprietors of it themselves are not likely
to approve of any dangerous extension even of their
own paper; both they and the directors know the
importance of confining the bank paper, generally
speaking, within its accustomed limits, and must ne­
cessarily be supposed to prefer its credit, and the pa­
per credit of the nation, to the comparatively trifling
consideration of a small increase in their own divi­
dends; an increase which would prove delusory, if it
should arise from that extravagant issue of bank notes
which would have the effect of depreciating all the
the circulating medium of the country, since it would
thus raise upon the proprietors of bank stock, as well
Federal Reserve Bank of St. Louis


as on others, the price of all the articles of life.* While
the proprietors and directors of the bank have thus an
interest on the one hand, in limiting the quantity of
paper issued, they are also naturally anxious, on the
other, in common with the whole commercial world,
to give the utmost possible credit to it; and although
an opinion should prevail, even to some extent among
persons out of business, that the appearance of gold
is the only test of wealth, and that the absence of it,
however temporary, implies great danger to the
country, the mercantile interest, and in particular the
bank proprietors, the bankers, and the traders of
London, by whose transactions the value of the Lon­
don paper is upheld, may be considered as combined
in the support of a juster sentiment. The bank itself
is known to have experienced, at former times (as ap­
pears from the evidence of the directors given to par­
liament), very great fluctuations in its cash; and, in one
period of returning peace and prosperity, a reduction
of it below that which took place at the time of the
late suspension of its cash payments: the amount of
gold in the bank, at any one particular aera, is, per­
haps, therefore, on the ground of this experience, not
no'w considered by the commercial world as having all
that importance which was given to it when the bank
* I f the bank notes were increased even five millions, the additional pro­
fit which would accrue to the proprietors would not be more than two per
cent. A proprietor qualified to vote in the bank court (that is, having
500/. stock) would, therefore, gain by this extravagant issue, supposing
it to be maintained for a year, the sum of 10L A large proportion of the
bank proprietors do not hold more than toco/. stock. The gain o f each
o f these would not be more than 20 1. ; a sum perfectly insignificant, com­
pare! with the interest which they have in the maintenance of the general
commercial credit o f the country,
Federal Reserve Bank of St. Louis


affairs were involved in greater mystery. It is per­
fectly well understood among all commercial men,
that gold coin is not an article in which all payments
(though it is so promised) are at any time intended
really to be made; that no fund ever was or can be
provided by the bank which shall be sufficient for such
a purpose; and that gold coin is to be viewed chiefly
as a standard by which all bills and paper money should
have their value regulated as exactly as possible; and
that the main, and, indeed, the only, point is to take
all reasonable care that money shall in fact serve as
that standard.
This is the great maxim to be laid down on the sub­
ject of paper credit. Let it, then, be next considered
what is necessary, in order sufficiently to secure that,
whatever the circulating paper may be, gold shall be
the standard to which the value of that paper shall
conform itself. It is no doubt important, that there
should be usually in the country a certain degree of
interchange of gold for paper, for this is one of the
means which will serve to fix the value of the latter.
W hether the interchange wanted to produce this effect
must be more or less large and frequent, depends
much on the habits and dispositions of the country,
and, in particular, on the degree of knowledge of the
nature of paper credit generally prevailing, and on the
degree of confidence in it.
In order to secure that this interchange shall at all
times take place, it is important that, generally speakmg, a considerable fund of gold should be kept in the
country, and there is in this kingdom no other depo­
sitory for it but the Bank of England. This fund
should be a provision not only against the common and
more trifling fluctuations in the demand for coin, but
Federal Reserve Bank of St. Louis


also against the two following contingencies, hirst,
it should serve to counteract the effects of an unfa­
vourable balance of trade, for this infallibly will
sometimes occur, and it is what one or more bad har­
vests cannot fail to cause. It is also desirable, se­
condly, that the reserve of gold should be sufficient to
meet any extraordinary demand at home, though a
demand in this quarter, if it should arise from great and
sudden fright, may undoubtedly be so unreasonable
and indefinite as to defy all calculation. If, moreover,
alarm should ever happen at a period in which the
stock of gold should have been reduced by the other
great cause of its reduction, namely, that of a call hav­
ing been recently made for gold to discharge an unfa­
vourable balance of trade, the powers of any bank,
however ample its general provision should have been,
may easily be supposed to prove insufficient lor this
double purpose.
To revert, then, to the bank of England. A short
time before the suspension of its cash payments, the
gold in its coffers had been reduced materially through
an unfavourable balance of trade. The exchange with
Europe had, however, so far improved for some time
preceding the suspension, as to have caused gold to
begin again to flow into the country. When it was
thus only beginning to return, the fear of an invasion
took place, and it led to the sudden failure of some
country banks in the north of England. O ther parts
ielt the influence of the alarm, those in Scotland, in a
great measure, excepted, where, through long use,
the confidence of the people, even in paper money of
a guinea value, is so great (a circumstance to which
the peculiar respectability of the Scotch banks has con­
tributed), that the distress for gold was little felt in
Federal Reserve Bank of St. Louis


that part of the island. A great demand on the Bank
of England for guineas was thus created, a demand
which every one who can possess himself of a bank
note is entitled to make by the very terms in which
the note is expressed. In London, it is observable
that much distress was beginning to arise, which was
in its nature somewhat different from that in the
country. In London, confidence in the Bank of Eng­
land being high, and its notes maintaining their ac­
customed credit, its guineas were little called for with
a view to the mere object of London payments. The
guineas applied for by persons in London, was, gene­
rally speaking, on the account of people in the coun­
try. The distress arising in London, like that which
took place in 1793, was a distress for notes of the
Bank of England. So great was the demand for notes,
that the interest of money, for a few days before the
suspension of the payments of the bank, may be esti­
mated (by calculating the price of exchequer bills, the
best test that can be referred to, as well as by com­
paring the money price of stocks with their time price)
to have been about sixteen or seventeen per cent, per
ann. The bank, on this occasion, pursued, though
only in a small degree, the path which a reader of Dr.
Smith would consider him to prescribe, as in all cases
the proper and effectual means of detaining or bring­
ing back guineas. They lessened the number of their
notes, which, having been for some years before near
eleven millions, and having been reduced, for some
time, to between nine and ten millions, were at this
particular moment brought down to between eight
and nine millions.
It has been shewn already, that, in order to effect
the vast and accustomed payments daily made in Lon­
Federal Reserve Bank of St. Louis


don, payments which are most of them promised be­
forehand, a circulating sum in bank notes, nearly
equal to whatever may have been its customary
amount, is necessary. But a much more clear idea of
this subject will be gained by entering into some de­
There are in London between sixty and seventy
bankers, and it is almost entirely through them that
the larger payments of London are effected. It may
be estimated (though the conjecture is necessarily a
loose one) that the sums paid daily by the bankers of
London may not be less than four or five millions.
The notes in their hands form, probably, a very large
proportion of the whole circulating notes in the me­
tropolis. It is certain, at least, that only a very small
proportion of Bank of England notes circulate far from
London, and that it is to the metropolis itself that all
the larger ones are confined. The amount of the bank
notes in the hands of each banker, of course, fluctu­
ates considerably; but the amount in the hands of all
probably varies very little ; and this amount cannot be
much diminished consistently with their ideas of what
is necessary to the punctuality of their payments, and
to the complete security of their houses. Thus there
is little room for reduction as to the whole of that
larger part of the notes of the Bank of England which
is in the hands of the London bankers: the notes
which may chance tc circulate among other persons,
especially among persons carrying on any commerce,
if we suppose the usual punctuality of payments to
be maintained, and the ordinary system of effecting
them to proceed, can admit also of little diminution.
A deficiency of notes in London is a very different
thing from a deficiency either of country bank notes
Federal Reserve Bank of St. Louis


or of coin in the country. A large proportion of the
London payments are payments of bills accepted by
considerable houses, and a failure in the punctuality
of any one such payment is deemed an act of insol­
vency in the party. The London payments are,
moreover, carried on by a comparatively small quan­
tity of notes; and they, perhaps, cannot easily be ef­
fected, with due regularity, by a much smaller num­
ber, so complete has been the system of economy in
the use of them which time and experience have in­
troduced among the bankers. There is, moreover, no
substitute for them. They have an exclusive, though
limited, circulation. They serve, at the same time,
both to sustain and regulate the whole paper credit of
the country.
It is plain, from the circumstances
which have just been stated, that any very great and
sudden diminution of Bank of England notes would
be attended with the most serious effects both on the
metropolis and on the whole kingdom. A reduction
of them which may seem moderate to men who have
not reflected on this subject—a diminution, for in­
stance, of one-third or two-fifths, might, perhaps, be
sufficient to produce a very general insolvency in
London, of which the effect would be the suspension
of confidence, the derangement of commerce, and the
stagnation of manufactures throughout the country.
Gold, in such case, would unquestionably be hoarded
through the great consternation which would be ex­
cited; and it would, probably, not again appear until
confidence should be restored by the previous intro­
duction of some additional or some new paper circu­
The case which has been put, is, however, mere­
ly hypothetical; for there is too strong and evident an
Federal Reserve Bank of St. Louis

interest in every quarter to maintain, in some way or
other, the regular course of London payments, to
make it probable that this scene of confusion should
o ccu r; or, even if it should arise, that it should con­
tinue. W hether there might chance to be much or
little gold in the country, steps would be taken to in­
duce the bank to issue its usual quantity of paper, or
measures would be resorted to for providing, by some
other means, a substitute for it. The credit, howe­
ver, of even the best substitute, would be far inferior
to that of the old and known Bank of England notes;
for the, new paper would be guaranteed by a capital
probably far less ample than that of the Bank of Eng­
land: it would also be just as impossible for the issu­
ers of it to procure, at the time in question, a supply
of guineas to be given in payment of it, as it would
for the Bank of England to provide a supply of gui­
neas for payment of their notes. The new paper,
then, though it should be the same in its general na­
ture, would be inferior to that of the bank. It would
yield, indeed, a profit to the issuers, a profit which
the bank would lose the opportunity of gaining; and
the desire of this profit might co-operate in producing
a disposition in new bodies of men to proceed to the
creation of it. If we suppose it to be created, and to
form one part of the current circulating medium of
the metropolis; and if we suppose, also, as we neces­
sarily must, a reduced quantity of Bank of England
notes to continue current at the same time, the new
paper would then be easily exchangeable for the Bank
of England paper; and every holder of the new paper
would, therefore, be able, by first exchanging it for
the bank paper, to draw gold out of the bank. The
directors of the bank, therefore, bv proceeding to such
Federal Reserve Bank of St. Louis


a reduction of their notes, as should create a necessity
for the-bankers and merchants to create a new paper
among themselves, would only increase the general
paper circulation in London. They have now, by
their exclusive power ot furnishing a circulating me­
dium to the metropolis, the means of, in some degree,
limiting and regulating its quantity 3 a power of which
they would be totally divested, if, by exercising it too
severely, they should once cause other paper to be­
come current in the same manner as their own. Pro­
jects for the introduction of a new circulating mediunv
into the metropolis have, at different times, been
form ed; all such schemes, however, must necessarily
fail, as long as there continues to be an unwillingness
among the bankers to unite in giving currency to the
new paper. This unwillingness would, of course,
diminish in proportion as the pressure should become
general and severe.
The idea which some persons have entertained of
its being at all times a paramount duty of the Bank of
England to diminish its rfbtes, in some sort of regu­
lar proportion to that diminution which it experiences
in its gold, is, then, an idea which is merely theoretic.
It must be admitted, however, to be very natural.
It has been supposed by some, that the pressure on
the mercantile worid which a great diminution of notes
must cause, would, especially if it were a severe one,
induce the merchants to send for gold from abroad, in
order to supply their own w7ant of money. The sup­
position, when thus put, is stated in much too vague
a manner to be susceptible of that close examination
which I wish to give to it. There can be no doubt that
we shall find it altogether false, when pushed to the
extent of assuming that the extreme severity of the
Federal Reserve Bank of St. Louis


pressure is to be the remedy. L et us consider this
point in as practical a way as possible.
It was supposed that the difficulty of obtaining
bank notes would cause the merchants to send abroad
for gold, in order to effect their payments. But what
merchants ? Certainly not those merchants whose
goods are unfit for a foreign market, and are in no
demand there. They must first exchange these un­
suitable goods for goods which are suitable, that is,
they must sell them; and if they sell them, they must
sell them, in the first instance, for money, or what
passes as money, and answers, in their view, all the
same purposes. Thus they get possession of the very
thing, to supply their want of which they are sup­
posed to send abroad. The trader acts, in this re­
spect, like anyone who is not a trader. If distressed
for the means of effecting what is called a cash pay­
ment, he no more turns his thoughts to a foreign
country for a supply of gold, than the farmer or
landed gentleman who is '“equally pressed. H e con­
siders only what part of hi^ property he can turn in­
to bank notes. These he sees to be at hand; of the
gold which is in foreign countries he knows nothing.
It will be allowed, then, that it is not on our traders
in general that the pressure will so operate as to in­
duce them to send for gold from the continent. It
will, perhaps, however, be said to operate on our fo­
reign merchants: but we must now distinguish, also,
between one foreign merchant and another. The ex­
port trade to foreign countries is, generally speaking,
one trade; the trade of importing from foreign coun­
tries is a second; the trade of sending out and bring­
ing home bullion, in order to pay or receive the dif­
ference between the exports and imports, may be
Federal Reserve Bank of St. Louis


considered as a third. This third trade is carried on
Upon the same principles with any other branch of
commerce, that is, it is entered into just so far as it is
lucrative to the speculator in bullion, and no farther.
The point, therefore, to be inquired into is clearly
this,—whether the pressure arising from a scarcity of
bank notes tends to render the importation of bullion
a more profitable speculation.
In solving this question, there is not, perhaps, all
the difficulty which might be supposed; for it is ob­
vious that, generally speaking, it will answer to im­
port gold into a country just in proportion as the goods
sent out of it, in the way of trade (that is, the goods
which must be paid for), are greater in value than the
goods which are, in the way of trade, brought into it.
W e may, therefore, now dismiss also the case of the
mere dealer in bullion from our consideration. W e
have only to examine in what way the pressure arising
from the suppression of bank notes will affect the
quantity of goods which are in the way of trade either
exported or imported.
That a certain degree of pressure will urge the
British merchants in general who buy of the manu­
facturers, as well as the manufacturers themselves,
to sell their goods in order to raise m oney; that
it will thus have some influence in lowering prices
at home; and that the low prices at home may
tempt merchants to export their articles in the hope
°f a better price abroad, is by no means an unrea­
sonable supposition.
But, then, it is to be ob­
served on the other hand, first, that this more than
ordinary eagerness of all our traders to sell, which
seems so desirable, is necessarily coupled with a ge­
reluctance to buy, which is exactly proportionate

ItaM irii 9
Federal Reserve Bank of St. Louis


to it: it must be obvious, that, when the general bo­
dy of merchants, being urged by the pecuniary diffi­
culties of the time, are selling their goods in order to
raise money, they will naturally also delay making the
accustomed purchases of the manufacturer. They
require of him, at least, that he shall give them a more
than usually extended credit; but the manufacturer,
experiencing the same difficulty with the merchants,
is quite unable to give this credit. The sales of the
manufacturer are, therefore, suspended; but though
these are stopped, his daily and weekly payments
continue, provided his manufacture proceeds. In
other words, his money is going out while no money
is coming in ; and this happens at an aera when the
general state of credit is such, that he is not only not
able to borrow, in order to supply his extraordinary
need, but when he is also pressed for a prompter pay­
ment than before of all the raw materials of his ma­
nufacture. Thus the manufacturer, on account of the
unusual scarcity of money, may even, though the sel­
ling price of his article should be profitable, be abso­
lutely compelled by necessity to slacken, if not sus­
pend, his operations. To inflict such a pressure on
the mercantile world as necessarily causes an inter­
mission of manufacturing labour, is obviously not the
way to increase that exportable produce, by the exce’ss
of which, above the imported articles, gold is to be
brought into the country.
But, secondly, that very diminution in the price of
manufactures which is supposed to cause them to be
exported, may al •», if carried very far, produce a sus­
pension of the labour ot those who fabricate them.
The masters naturally turn off' their hands when they
find their article selling exceedingly ill. I t is true,
Federal Reserve Bank of St. Louis


that if we could suppose the diminution of bank paper
to produce permanently a diminution in the value of
all articles whatsoever, and a diminution, as it would
then be fair that it should do, in the rate of wages al­
so, the encouragement to future manufactures would
be the same, though there would be a loss on the
stock in hand. The tendency, however, of a very
great and sudden reduction of the accustomed num­
ber of bank notes, is to create an unusual and tempo­
rary distress, and a fall of price arising from that dis­
tress. But a fall arising from temporary distress, will
be attended probably with no correspondent fall in the
rate of w ages; for the fall of price, and the distress,
will be understood to be temporary, and the rate of
wages, we know, is not so variable as the price of
■goods. There is reason, therefore, to fear that the
unnatural and extraordinary low price * arising from
* It may, peihaps be supposed, that a diminution o f the quantity of
Bank o f England notes, if permanent, would produce that permanent
diminution o f the price o f articles which is so much desired, and the ob­
servation made above may be thought to give some countenance to this
supposition. Such permanent reduction in the price o f commodities could
not, however, as I apprehend, be by any such means effected. The general
and permanent value o f bank notes must be the same as the general and
permanent value o f that gold for which they are exchangeable, and the
value o f gold in England is regulated by the general and permanent value
o f it all over the w orld ; and, therefore, although it is admitted that a
great and sudden reduction o f bank notes may produce a great local and
temporary fall in the price of articles (a fall, that is to say, even in their
gold price, for we are here supposing gold and paper to be interchanged),
the gold price must, in a short time, find its level with the gold price over
the rest o f the world. T h e continuance o f the great limitation of the
number of bank notes would, therefore, lead either, as has already been
observed, to the creation o f seme new London paper, or possibly to some
new modes of economy in the use o f the existing notes; the effect o f
which economy on prices would be the same, in all respects, as that
Federal Reserve Bank of St. Louis


the sort of distress of which we now speak, would
occasion much discouragement of the fabrication of
Thirdly, a great diminution of notes prevents much
of that industry of the country which had been exert­
ed from being so productive as it would otherwise be.
When a time either of multiplied failures, or even of
much disappointment in the expected means of effect­
ing payments arises, plans of commerce and manu­
facture, as well as of general improvement of every
kind, which had been entered upon, are changed or
suspended, and part of the labour which had been be­
stowed proves, therefore, to have been thrown away.
If, for instance, expensive machinery had been erect­
ed, under an expectation of regular employment for
it, a pressing want of the means of effecting pay­
ments may cause that machinery to stand idle. The
goods which ought to form part of the assortment
of the factor or the shopkeeper, and to be occupy­
ing their premises, are loading the warehouse of
the manufacturer,* and, perhaps^ are suffering da-

o f the restoration o f the usual quantity o f bank notes. W hat seems
m ost probable, is, that the cominuance o f any great limitation o f the
number o f bank notes would lead to the transfer of the present cash pay­
ments of London to some other place or places in which the means o f ef­
fecting payments should not be obstructed through the too limited exer­
cise of that exclusive power o f furnishing a paper circulation with which
the Bank of England has, by its charter, been invested. T h is subject
o f the influence of paper credit on prices will be more fully entered into
rn a future chapter.
* W hen an interruption o f the usual credit arises, it naturally happens
that the individuals having the least property, and the fewest resources,
are the most pressed ; and it is sometimes assumed by the public, rather
too readily, that those who suffer are justly punished for the too great
extent o f their speculations.
Federal Reserve Bank of St. Louis

It is true, undoubtedly, that those who

mage by too long detention. On the other hand, some
sales are forced; and thus the goods prepared for one
market, and best suited to it, are sold at another.
There cease, at such a time, to be that regularity and
exactness in proportioning and adapting the supply to
the consumption, and that despatch in bringing every
article from the hands of the fabricator into actual use,
which are some of the great means of rendering in­
dustry productive, and of adding to the general sub­
stance of a country. Every great and sudden check
given to paper credit not only operates as a check to

prove to be the first to fail, have.probably been men of too eager and ad­
venturous a spirit. Let the spirit of adventure among traders, however,
have been either more or less, the interruption o f the usual credit cannot
fail to cause distress $ and that distress will fall upon those who have
merely been, com paratively, the more adventurout part of the trading
world. It is often also assumed by the public (and without the least
foundation) that the want not o f gold merely but of bona fide mercantile:
cap tal in the country is betrayed by a failure o f paper credit. T h e er­
ror o f this supposition is not only plain, from the general principles laid
down in the first chapter o f this work, but it is also distinctly proved by
the circumstance stated above, that while the premises o f the factor and
o f the shopkeeper are becoming empty o f goods, the warehouse o f the
manufacturer is growing proportionably full. T h e time soon comes,
indeed, when that suspension o f labour (which, it should be remember­
ed, is the consequence o f the suspension of credit) causes the general stock
o f goods (or the vne:cantile capital o f the country) to be diminished.
T h e evil, therefore, consists not in the want o f bona fide capital, but in
tile want o f such a quant ty o f the circulating medium as shall be suffi­
cient, at the time, to furnish the means o f transferring the goods o f the
manufa&urer from his own warehouse to that o f the factor and the shop­
keeper. T he quantity wanted to be employed in the circulation, and es­
pecially the quantity of gold, becomes more, as was observed in the third
chapter, when confidence is less, because the rapidity o f the circulation
i* less. T h e substitution o f gold for paper, and of better paper for that
which is worse, and some temporary increase o f the gold and good paper
actually circulating, are obviously the remedy.
Federal Reserve Bank of St. Louis


industry, but leads also to much of this misapplication
of it. Some diminution of the general property of the
country must follow from this cause; and, of course,
a deduction also from that part of it which forms the
stock for exportation. It can hardly be necessary to
repeat, that on the quantity of exported stock depends
the quantity of gold imported from foreign countries.
It will be supposed, perhaps, that the limitation of
bank notes, by lessening the means of payment of the
- importing merchant, may induce him to suspend his
imports; and that, since it is the excess of exports
above the imports which causes gold to enter the
country, the limitation of paper may, with a view to
the diminution of imports, be very desirable. There
is, probably, some justice in this supposition. It
should, however, be observed on this subject, that
Great Britain, at that period of an unfavourable ba­
lance which we are now supposing, may be consi­
dered as importing chiefly either, first, corn, of which
no one would wish to check the import by a limitation
of paper; or, secondly, that class of articles which are
brought from one country in order to be transported to
another; articles which come chiefly from very dis­
tant parts, and of which the payment cannot be de­
clined, it having been promised long before hand ; arti­
cles, also, which soon serve to swell the exports in a
somewhat greater degree than they had increased the
imports; or, thirdly, that rude produce of other coun­
tries which forms the raw materials of our own manu­
facture, and serves, after a short time, to supply ex­
portable articles to a very increased amount.
The limitation of credit at home will chiefly be of
use by urging the exporting merchant to press the
sale of the goods which he has abroad, and to direct
% for FRASER
Federal Reserve Bank of St. Louis

them to be sold, if he can, at a short credit; and also
by its urging, in like manner, the importing merchant
to delay buying abroad, as long as he can, and to buy
at a long credit. In other words, it may be of use in
leading English merchants, in their dealings with fo­
reigners, to anticipate their receipts, and to delay their
payments; on the other hand, it is carefully to be re­
membered, that an anticipation of receipts, and a de­
lay of payments, are only a temporary benefit; while
a suspension of manufactures operates, as far as it goes,
as so much permanent and entire loss to the country.
It is, moreover, to be borne in mind, that a very se­
vere pressure is sure to produce a suspension of manufactures, while it is not sure to cause British mer­
chants to obtain an extension of credit from foreign­
ers. Any very extraordinary suppression of bank
notes must produce distrust abroad through the
failures at home, to which it is known abroad to give
rise. It, therefore, indisposes foreign merchants to
lend money to England, and it induces those foreigners,
who have debts due to them from Englishmen, to
urge the payment of those debts. England, during
the prevalence of any great distrust, is obliged to send
abroad manufactures not for the payment of goods im­
ported, or for the purchase of gold, but for the extinc­
tion of debt.
Although, therefore, it may possibly admit of a
doubt whether some moderate restriction of the paper
of the bank may not be expedient with a view to
mend for the time an unfavourable balance, it seems
sufficiently clear that any very sudden and violent re­
duction of bank notes must tend, by the convulsion to
which it will lead, to prevent gold from coming into
the country rather than to invite it, and thus to in
Federal Reserve Bank of St. Louis


crease the danger of the bank itself. The observation
which was before made may, therefore, be repeated,
that it is not the severity 0/ the pressure which is to be
the remedy. It is, indeed, in every respect plain that
it must be important to maintain, and to obtain care­
fully, the credit of the country, at that time in parti­
cular, when its guineas are few, and are also leaving
it; that is the time when our own lunds are necessa­
rily low, when the most regular industry should by
every means be promoted, and when there is the most
need of the aid both of our domestic and foreign cre­
dit; and it belongs to the Bank of England, in parti­
cular, to guard and to superintend the interests of the
country in this respect. The very policy of the bank
differs, in this particular, from that of the individual
country banker, whose own share of the evil result­
ing to the country, from the sudden suppression of
his own notes, is small; who may trust, moreover,
that there will be a substitution either of guineas or
of other paper in the place of his own paper which is
suppressed; and who, it may be remarked, supplies
himself with the means of discharging his own notes
by obtaining guineas from the Bank of England.
But the Bank of England has no bank to which it
can resort for a supply of guineas proportioned to its
wants in the same manner in which it is resorted toby
the country banks; nor have the bankers and traders
in London, to whom at present is transferred the bu­
siness of effecting the great cash payments of the
whole country, the same resource in case Bank of
England notes are suppressed which traders in the
country have, supposing country bank notes to be
withdrawn. The country payments being not strictly
promised before hand, may, many of them, bear to be
Federal Reserve Bank of St. Louis


postponed. Bills of exchange on London may also
form some substitute for country bank notes, and may
pass as such in the manner which was some time ago
described; but if Bank of England notes are sup­
pressed, and are suppressed, as we have been suppos­
ing them to be, in consequence of guineas being
scarce, there then remain no means whatever of ef­
fecting the London payments. There can be no doubt
that the extinction or very great diminution of bank
notes would be a far greater evil, in the present cir­
cumstances of the metropolis, than the disappearing
of guineas. I f guineas disappear, notes may be sub­
stituted in their place; and through that general con­
fidence which may be inspired by the agreement of
bankers and other leading persons to take them, they
will not fail, provided the issues are moderate, and the
balance of trade is not very unfavourable to the coun­
try, to maintain exactly the gold price. The punctu­
ality thus introduced into all the larger operations of
commerce, will facilitate contrivances for effecting the
smaller payments.
Differences of opinion, undoubtedly, may exist as
to the exact degree in which the notes of the Bank of
England ought, under any given circumstances, to be
diminished. It may be hoped, however, that at least
one point has nowr been fully and completely esta­
blished, namely, that there may be an error on the side
of too much diminishing bank notes, as well as on the
Side of too much increasing them. There is an ex­
cessive limitation of them, as every one must admit,
which will produce failures ; failures must cause con­
sternation, and consternation must lead to a run upon
the bank for guineas. There must, in short, then, be
some point at which the bank must stop in respect
Federal Reserve Bank of St. Louis


to the reduction of its notes, however progressive may
be the drain upon it for guineas.
But if its notes are not lessened, or if even they are
lessened, but are not entirely extinguished, it is then
in the power of any one who can possess himself of a j
bank note to possess himself also of guineas, as long j
as the bank pays in guineas; and it will be found to
follow, moreover, that the bank is thus rendered liable
to be totally exhausted of guineas. I mean* that it is
liable to be totally exhausted of them, however great
their number may have been, if it determines to main- i
tain*even the smallest number of notes. By maim
taining, that is to say, five millions, or two millions, j
or even one million, of notes, the bank cannot avoid
being exhausted (supposing the alarm to rise high
enough to do it) of even five millions, or ten mil­
lions, or, if it had them, of twenty or fifty millions of
guineas. It will depend, in such case, on the degree
of alarm, and not on the maintenance of the greater or
of the less quantity of notes, whether the guineas shall
be more or less rapidly called for from the b an k ; or,
in other words, the bank may be as much exhausted
o f guineas if it maintains five millions of notes as if it
maintains ten millions, provided the alarm is only the
same in the one case as in the other. If, therefore, j
the maintenance of the five millions of notes is sure to
produce more alarm than the maintenance of ten ,j
then the maintenance of the larger quantity of notes
will serve to diminish the demand for guineas, and
the maintenance of the smaller number to increase
The following is the manner in which that opera­
tion, which is finally to exhaust all the guineas of the
bank, may be supposed to proceed. A , for instance, !
Federal Reserve Bank of St. Louis


llie holder of a note of 1 0 0 0 /. (and it is what any man
may obtain by selling goods) carries it'to the bank and
demands 1 0 0 0 /. in gold. The bank gives the gold;
which gold, let it be remarked, either goes abroad to
pay for an unfavourable balance of trade, or, as we are
now rather supposing, fills a void in the circulation of
the country, occasioned by the withdrawing of coun­
try bank notes in consequence of alarm, o; serves as
an addition to the fund of country banks, or forms a
hoard in the hands of individuals. The 1 0 CC/. in gold,
thus furnished by the bank, does not supply, in any
degree, the place of the 1 0 0 0 /. note for which it was
given; for the 1 0 0 0 /. note had been employed in Lon­
don in making the larger payments. It is hardly ever,
in almost any degree, as a substitute for Bank of Eng­
land notes, that the gold taken from the bank is
wanted. The bank, therefore, having paid away this
1 0 0 0 /. in gold, and having received for it their own
note for 1 0 0 0 /. must now re-issue this note, if they
are resolved to maintain the amount o f their paper cir­
culation. How, then, is the bank to issue it ? The
only means which the bank, on its part, is able to
take for the extension of its paper circulation, is to
enlarge its loans, i t must, therefore, re-issue the
1 0 0 0 /. note, in the shape of a loan, to some person
who offers a bill to discount. It receives, therefore,
a bill of 1 0 0 0 /. and gives a note of 1 0 0 0 /. in return for
it. For the same note, thus re-issued, we may sup­
pose 1 0 0 0 /. in money to be again demanded, and to
be again paid. The paper circulation of the bank is
now again diminished 1 0 0 0 /. and, therefore, there
arises a necessity for issuing the same 1 0 0 0 /. note, or
some other note or notes to like amount, a third time,
in order to maintain the amount of notes in circulation.
Federal Reserve Bank of St. Louis


The like transaction, or rather a number of such trans­
actions, may be supposed to be repeated either five,
or fifty, or a hundred, or a thousand times. Even if
we should suppose the bank to bring down its paper
circulation to one hundred thousand pounds, and to
maintain it at that sum, it is obvious that this same
operation might be so reiterated, from day to day, as
to extract at length from the bank even the greatest
imaginable number of guineas. Thus, then, the bank
is rendered liable to be exhausted of its guineas, by
its determination to maintain the number of its notes,
whether that number be greater or smaller; and here,
also, let it be remarked by the way (a point on which
more shall be said presently), that the bank, in conse­
quence of its determination to maintain a given num­
ber of notes, is placed under an absolute necessity of
increasing its loans to the very same extent to which
it is deprived of its guineas. * The bank, let it be re­
membered, was stated to lend an additional 1 0 0 0 /. on
the occasion of each reiterated demand upon it for
1 0 0 0 /. in guineas.
It thus clearly appears that the
Bank of England is placed, by the very nature of its
institution, in a situation in which it may not be pos­
sible to avoid a temporary failure in the regularity of
its cash payments.
An idea has, indeed, prevailed, than which nothing
can be more natural, that because an individual mer­
chant is presumed to be blameable if he is not able to
make good his payments, therefore, also, a national
bank, in case of failure, may be presumed to be cen­
surable in like m anner; and, on account of the great­
er importance of its transactions, to be censurable even
in a still higher degree. But the total disparity in the
circumstances of the two cases should be taken into
Federal Reserve Bank of St. Louis

consideration. Private houses may, in general, be
fairly presumed to be in fault if they fail in the punc­
tuality of their cash payments, supposing the Bank of
England to pay in money, because, if they have made
on their part a tolerably prudent provision, they may
be in general considered as having in the bank a sure
resource. Take away from them that resource, and
they will then be not only as liable as the Bank of
England to the like accident, but they will be much
more so, their means of supplying themselves with
guineas becoming then exceedingly precarious. I t
may be apprehended, also, that, if instead one national
bank two or more should be instituted, each having
a small capital; each would then exercise a separate
judgm ent; each would trust in some measure to the
chance of getting a supply of guineas from the other,
and each would allow itself to pursue its own parti­
cular interest, instead of taking upon itself the supermtendance of general credit, and seeking its own safe­
ty through the medium of the safety of the public;
Unless, indeed, we should suppose such a good under­
standing to subsist between them as to make them
act as if they were one body, and resemble, in many
respects, one single institution.
The accident of a failure in the means of making
the cash payments of a country, though it is one against
which there can be no security which is complete,
scems, therefore, to be best provided against by the
establishment of one principal bank. It, however, be­
comes the public not to judge the bank, which is thus
rendered its servant, and is completely subjected to
its interests, by the same rules by which it judges of
smaller banking and commercial establishments, but
to advert to the peculiarity of its case.
Federal Reserve Bank of St. Louis



If there has been any fault in the conduct of the
Bank of England, the fault, as I conceive, has rather
been, as has just been stated, on the side of too much
restricting its notes in the late seasons of alarm, than
on that of too much enlarging them. In doing this,
it has happened to act (though but in part) according
to what seems likely to have been the advice of Dr.
A. Smith in the case. It has also taken that course
which is the natural one for smaller banks, and which
might, perhaps, have been the proper one for the Bank
of England itself, in the infancy of its establishment,
when the country was less dependent upon it for the
means of effecting its payments. It has, probably,
pursued a principle which bad been acted upon, by
its own directors, in all former times. It has also fol­
lowed what was, at the very period in question, the
common opinion of the public on the subject. It has,
moreover, only diminished those notes, perhaps, in
too great a degree, which there might possibly be
found to be some argument for restraining with a more
gentle hand. I venture, however, with deference, to
express a suspicion that the bank may have, in some
measure, aggravated, perhaps, rather than lessened,
the demand upon itself for guineas through the sup­
pression of too many notes at the time preceding the
suspension of its cash payments; and I will hazard an
opinion, that it might also, with propriety, have some­
what extended the temporary issue of its paper in the
year 1793, when that alarm, arising from the failure
of country banks, which has been already spoken of,
took place. It is clear, at least, that it did not, in the
more recent instance, succeed by the diminution of its
notes in curing the evil which it thus aimed to reme­
Federal Reserve Bank of St. Louis


A suspicion prevailed, at the time ot which we
have been chiefly speaking, that the loans afforded by
the bank to the government had caused the distress
of the bank. But the government, it should be re­
membered, has no supply of guineas with which it
can discharge any debt. It is circumstanced, in this
respect, like any other debtor of the bank. It must,
if forced to pay its debt, pay it in bank notes, an arti­
cle which the bank cannot refuse to take. And thè
government must collect these notes wherever they
are to be obtained^ that is, from the bankers and tra­
ders, and other persons in possession of them, to whom
it must, in return, give new stock or exchequer bills,
which it may, at ail times, easily create; though, at a
period of mercantile distress, this would be done at a
somewhat unfavourable price. We learn, from the
evidence given to parliament, that the government
was urged by the bank to pay up four and a half mil­
lions of existing debt a short time before the period in
question, and that it complied with the demand ; that
is, the government collected some ot the bank notes
which were in circulation, and paid them into the
bank; and then a part, but only a part, of the notes
so paid in were re-issued to the merchants. I f the
whole of the notes paid into the bank by the govern­
ment had been immediately re-issued in loans to pri­
vate traders, then the sum o f notes in circulation
Would have been the same. The government is only
one large borrower from the bank ; the merchants are
a number of similar, though smaller, borrowers. Whe­
ther, therefore, the bank lent more to individuals and
less to government, or less to government and more
to individuals, the effect as to the number of notes al­
lowed to be in circulation, must have been equal.
Federal Reserve Bank of St. Louis

The Exchequer, after receiving notes frdm the bank,
almost as quickly pays them away, and thus sends
them into the common circulation as the merchant
does; and it is the total quantity of circulating notes,
and not the manner in which they come into circula­
tion, that is the material point.
It may be thought, indeed, that commerce would
be encouraged, and commercial credit, as well as ge­
neral paper credit, would be supported in a much
greater degree by the bank sending their notes into
circulation, through the medium of a loan to the mer­
chants, than through that of a loan to government.
But the difference would not, as I apprehend, be so
great as many commercial men themselves at that time
imagined. Those merchants who obtained an increase
of the accustomed advances from the bank, would,
some of them, probably invest, in the new exchequer
bills which were created, a part of that very sum with
which the bank favoured them. The merchants in
higher credit, of course, would have the preference
at the bank; and they were certainly under a very
strong temptation to borrow' of the bank at five per
cent, interest for the sake of investing the sum so
borrowed in exchequer bills, yielding five and a half
or six, or, for a time, even seven or eight per cent,
or more. As far as this was the case, it is obvious
that the bank, instead of lending to the government,
would only lend to those who lent to the government,
the government paying an additional interest, and the
merchants receiving it. Where this did not take
place, that might happen which would be exactly
equivalent. The bankers finding that the merchants
were, many of them, allowed to become larger bor­
rowers at the bank than before, would think it less
Federal Reserve Bank of St. Louis


necessary to lend to them, and would, therefore, add
to the sum which they themselves kept in exchequer
bills, the great profit on that article tempting them,
at the same time, to do this. The bank, on this sup­
position, would lend to the merchants, who would
forbear to borrow of the banker (which is the same
thing for the present purpose as lending to the bank­
er), who would lend to the government. But let us
put a third case. Let us imagine it to be a gentle­
man in the country who invested theXjroperrv in the
new exchequer bills. That property would probably,
since we must suppose it easily applicable to such in­
vestment, have been lying in some private hand at
interest. Let us imagine it to consist of 1 0 0 /. which
had been in the hands of a country banker; the coun­
try banker, in this case, would draw upon his London
banker; the country banker’s account with the Lon­
don banker would then be worse by 1 0 0 /.; and the
London banker having 1 0 0 /. less deposits, would be
able to lend 1 0 0 /. less to the London merchants. In
other words, the Bank of England, in this case, in­
stead of lending to the government, would lend to
the London merchant, who would forbear to borrow
of the London banker, who would lend to, or per­
haps, forbear to borrow of the country banker, who
would forbear to borrow of the country gentleman,
^no would lend to government; which also seems to
he much the same as if the Bank of England them­
selves lent to the government. This detailed case has
been put partly for the sake of observing upon it, that
the necessity which would be created for the transfer
°f this 1 0 0 /. through so many hands, would produce
a want of some degree of additional circulating methum in order to ejject these several payments. I t
Federal Reserve Bank of St. Louis


would, however, be chiefly by the means of a bill on
London that the transaction just now supposed would
be conducted^ but the bill must finally be paid by a
Bank of England note.— Let us imagine a fourth case.
L et us suppose a sum to be invested in the new ex­
chequer bills by a person obtaining money for the pur­
pose of the investment, not by calling in a sum lying
at interest, as wras last assumed, but by selling goods,
land, or any other article. We must, then, necessa­
rily suppose a buyer of those goods, of that land, or of
that other article to be created by such sale. AVe
shall find, also, that it is necessary to suppose either
that buyer to become a borrower, or to become the
seller to one who would become a borrower; or, at
least, we must come to a borrower at last. W e are
supposing one man to sell goods for 1 0 0 /. and not to
restore this 1 0 0 /. to trade, but to lend it out. W e
must, then, necessarily suppose some other man to
borrow 1 0 0 /. and by thus borrowing to add that
1 0 0 /. capital to trade which the other had taken from
it; for since the trade goods in the country remain
the same, the capital invested in trade must be the
same also. The body of lenders, therefore, whoever
they might be, who lent the four and a half millions
to government, necessarily created a body of borrow­
ers to exactly the same amount in what mav be called
the g-eneral money market ot the country. Thus a
pressure was, on the whole, created, which was just
equal to that which was relieved; a pressure, in
the first instance, falling in some degree (though
by no means entirely, or even principally) in a dif­
ferent quarter than before; a pressure, however,
very soon extending itself to the same persons; for
there is a competition among the several classes both
Federal Reserve Bank of St. Louis


of borrowers and of lenders in the money market,
which, notwithstanding some inequality occasioned
by the usury laws, causes the increased distress
brought upon any one class of the accustomed bor­
rowers very soon to distribute itself among all. The
bank, it is true, would, by lending the four and a half
millions in bills at two months, possess more means
of at any time diminishing its loans, and of thus les­
sening also its notes, than if the same sum had been
invested in exchequer bills, since the latter are at a
longer date; and it was natural for the bank to call in
its loan to government for this reason. If, however,
the calling in of the loan to government was only to
furnish the means of limiting the notes, then that
question returns which has already been discussed,
namely, whether the diminution of the notes was
not carried possibly somewhat farther than was d e­
sirable, even for the sake of the bank itself; D u­
ring the existence of this loan to government, that
reduction of notes, which has been supposed to
have been too great, may have been perhaps, to a
certain degree obstructed, though by no means ne­
cessarily precluded; since an opportunity of dimi­
nishing the discounts to the merchants, and of thus
lessening the notes, at all times existed. On the
whole, there appears to be no reason to infer, from
the circumstance of the demand for the four and a half
millions having been made upon government, that the
government was either the more remote c-r the more
immediate cause of the suspension of the cash pay­
ments of the bank, except, undoubtedly, so far as
the war in general, or the particular circumstance of
remittance of a subsidy to the Emperor a short time
before the event in question, might be considered as
Federal Reserve Bank of St. Louis


affecting the balance of trade, and thus contributing to
draw gold out of the country.
It is, on public grounds, so important to shew that
the more than usual largeness of the bank loans to
government (for it can hardly fail to be true that they
were more than commonly extended) was not the
cause of the suspension of the cash payments of the
bank, that I shall dwell for some time longer on this
subject. This was continually charged as the cause,
and it was not unnatural to suppose it to be so. The
paper circulation of the bank, however, it has been
observed, was at this time not increased. It was, on
the contrary, much reduced. It was by no means
higher than was necessary for securing the regularity
of the payments of the metropolis. Now, if it be al­
lowed that there was this necessity for maintaining
the existing quantity of notes, it then was not the
notes which must be considered as issued for the pur­
pose of making the loans, but the loans must be con­
sidered as made in consequence of the issue of notes.
W hen the notes of the bank are increased, the loans
must be increased also; when the notes are main­
tained, the loans must be maintained in as great pro­
portion ; when the notes are decreased, the loans can
be. .decreased only in that proportion. There can,
then, be no matter of blame on account of the ma^nitude of the loans, unless there be matter of blame on
account of the magnitude of the notes. But the notes
I have stated to have been probably rather too few
than too many. If the reader has agreed with me in
this, he must then agree with me that the loans were
too scanty rather than too large. In other words,
then, the bank, at the time of the failure of its cash
payments, had lent too little rather than too much. If
Federal Reserve Bank of St. Louis


the bank would have somewhat diminished its danger
by issuing more notes, the granting of more loans
would have also diminished its danger. Thus the very
converse to the common opinion on this subject seems
to be the truth.
There is, however, another point of importance
here to be remarked. The loans which the bank had
made on the whole, that is, the loans to government
and to individuals taken together, at the time of the
suspension of its cash payments, were not only main­
tained in that proportion in which the notes were
maintained, but they were increased beyond that pro­
portion. This increase beyond that proportion was
also a matter of necessity.
The loans of the bank do not simply keep pace
with the notes. The loans necessarily increase or
diminish through another cause; they diminish as
gold flows in to the bank, and increase as gold goes
out, supposing, as we generally may, the article of de­
posits to remain the sam e; that is, they necessarily
increase and diminish in a ratio directly contrary to
that which a theorist would prescribe, and which the
public naturally would suppose.
To those who are but slightly acquainted with these
subjects, this truth will probably be made much clearer
by a statements of the whole disposeable effects of the
Bank of England, and of the manner in which those
effects are employed. The statement is important,
because it will serve to prove, beyond the possibility
of contradiction, that the extraordinary largeness ct
the loans of the bank, at the critical period in question,
ought to be considered not as a consequence of any
disposition in the bank to be great and adventurous
•lenders at a time when their guineas grew low, but
Federal Reserve Bank of St. Louis


as arising out of the necessity under which they were
placed. I mean that they could not avoid lending to
the whole extent to which they did, provided even
that small number of notes which they kept in circu­
lation was maintained.
The effects of the bank on the 25th February, 1797,
I mean those effects which were their own, as well
as those placed in their hands belonging to other per­
sons, may, in conformity to the account rendered by
themselves to parliament, be stated, in round num­
bers, to have been as follows.
(It may be premised, that they had a capital of their
own of about 11,626,000/. which shall be excluded
from our present consideration, it being lent to go­
vernment at three per cent, per annum interest).
1 . They had a sum of undivided pro­
fits which formed an additional and disposeable capital of nearly
£ . 3,800,000
2 . They had of deposits lodged with
them by customersofvarious classes about 5,100,000
These deposits include, as may be pre­
sumed, the dividends belonging to many
proprietors of stock, which maybe viewed
in the same light with the cash kept by
an individual in the hands of his banker.
3. They had what may be considered
as disposeable effects, or deposits placed
in their hands in return for bank notes
issued * .................................................
Thus the bank had, at that time, dis­
poseable effects amounting in all to £ . 17,5CO,OCO
* T he render, perhaps, may not understand upon what principle it is
that the amount o f the notes o f the Bank o f England is classed among the

T he amounj o f them was placed on this side of the account rn
Federal Reserve Bank of St. Louis


It will much illustrate what is about to be added,
it the following observations respecting these three
several heads of disposeable effects are here made.
First. Let it be remarked, that the first sum of
3,800,000/. does not fluctuate; it only increases gra­
dually and in a small degree.
Secondly. The second sum of 5,100.000/. fluctu­
ates probably but little ; and as far as it does so, it
fluctuates not at the pleasure of the bank, but at the
will of its customers.
Thirdly. The third, then, is the only one of the

»he statement given to parliament by the bank, and very properly, or ra­
ther very necessarily. It is not, however, the notes which themselvea
form deposits. They are given in return fo r deposits ; and they are, there­
fore, the measure o f those deposits. It is in substance the same thing
whether a person deposits 100/. in money with the bank, taking no note,
but obtaining a right to draw a draft on a banking account which is opened
in his name, or whether he deposits the same io o /. and receives for ita bank

T he possession ot the light to draw obtained in the one case, is

exactly equivalent to the possession o f the note obtained in the other.
The notes, it is true, are commonly issued not in consideration of money
received, but o f bills discounted; but the deposits, it may also be ob­
served, are generally formed by the same means o f bills discounted. T'ne
manner o f transacting the discounting business at the bank is this :— the
discounter opens a banking account with the bank, and usually keeps a
Small balance upon i t ; when he sends bills to be discounted, those bills,
if the bank consents to discount them, are placed to the credit of his bank­
ing account; and when he draws for them, or for any part o f them, the
bearer t f his draft receives the amount o f it in bank notes. T he numer­
ous balances, therefore, (in general small ones), which the discounters
keep with the bank, are included, no doubt, in the bank account, under
the heaJ of deposits, and form a part of the second item in the statement
above. T he sum which I have considered as deposited in the bank, by
those who take away the notes, they opening no account, is pot termed
deposits in the bank statement. I have, however, thought it necessary' So
to term it, in order to make the subject the more clear to the reader.
Federal Reserve Bank of St. Louis


three component parts of the disposeable effects of the
bank which it is in the power of the bank to increase
or diminish at its own option. The bank exercised
their power of diminishing this article, at the time in
question, so far as to bring it down to about 8,600,000/.
To reduce it thus far was, as has been repeatedlystated, to reduce it, perhaps, somewhat too m uch;
but let us assume only, that the reduction was
sufficient, or nearly sufficient. The bank, then, it
must be admitted, had 17,500,000/. of disposeable ef­
fects, and it was not to be ascribed to them as a mat­
ter of blame that these effects then stood at about the
sum at which they did.
Having, then, these effects, and being under a ne­
cessity of disposing of them in some way or other, let
us state next how they did in fact employ them.
In proceeding to make this statement, it will be
necessary, with a view to the object for which it is
made, to name some specific sum (it matters not whe­
ther more or less than the real one) for the amount of
that part of the effects of the bank which was, on the
25th February, 1797, invested in bullion. In the ac­
count rendered to parliament, the value of the bullion
and of the bills discounted, 8cc. are put together, and
are stated at nearly seven millions. Let it be sup­
posed that the bullion was either one, two, or three
millions ; and that the bills discounted, &c. were,
therefore, either four, five, or six millions. The mode
of disposing of the 17,500,000/. will then be as fol­
The bank invested in government securities, that *
is, in exchequer bills, in loans to governmnt made on
the security of the land and malt tax which was com
Federal Reserve Bank of St. Louis

ing in, and in treasury bills of exchange growingdue,
a b o u t ..............................................
£ . 10,500,000
They invested, as shall for the present
"be assumed in conformity to the estimate
which it was before proposed to make,
“ in bills discounted to the merchants,”
in what is termed in their account, “ mo­
ney lent,” and in some other (probably
small) “ articles,” .............................
And they had property invested in
bullion, as shall for the present be as­
sumed, amounting to - - - - 3,000,000
M aking
which the
fore stated

together, as the investment
must, the same sum exactly
disposeable effects were be­
to amount to, namely - £ . 17,500,000

This same account of the investment may be given
more briefly and conveniently for our present purpose,
in the following manner, viz. the total sum lent both
to government and to individuals, or, in other words,
the total loans were - - - - j£ . 14,500,000
The total of the bullion was
- 3,000,000
Making t o g e t h e r ............................. <£. 17,500,000
It will now be obvious to the reader, that if the bul­
lion, instead of three millions, is supposed to have been
°nly two millions, then the total of the loans must be
supposed to be increased one million; and that if the
bullion, instead of three millions, is supposed to be
°uly one million, then the loans must be supposed to
be increased two millions.
In other words, the account of the investment may
Federal Reserve Bank of St. Louis


either be stated as has been just done, or it may be
stated as follows:
£ . 15,500,000
Total loans
2 ,000,000
M aking together, as before,

«•; -


O r total loans
Bullion - M aking together, as before,



1 0 0 0 ,0 0 0



<£. 17,500,000

It thus appears that the loans necessarily must in­
crease in proportion as the gold decreases, provided
the disposeable effects remain the same.
It follows, on the principle which has just been ex­
plained, that if wre suppose, as we necessarily must,
the bullion to have been, twelve months before the
time of the suspension of the cash payments of the
bank, much higher than at the period of the suspen­
sion, the loans would, during the coure of those
twelve months, necessarily increase. Let us (for the
sake of illustration) suppose the gold to have been a
year before the suspension eight millions, and to have
fallen on the 26th February, 1797, to the sum of two
millions. In that case, if wTe wrere to suppose the
disposeable effects of the bank to have been at both
periods the same, there must necessarily have been,
in the course of the year, an increase of the bank loans
or no less than six millions. But the effects of the
bank were not quite the same at the tw'o periods.
They probably were higher by about two millions at
the former period ; for the notes were higher by nearly
that sum. The notes, then, fell in the year twfo mil
Federal Reserve Bank of St. Louis


.lions, but the bullion fell six. The loans, therefore*
would be decreased two millions, through the de­
crease of notes, but would be increased six millions
through the decrease of bullion; that is, they would
necessarily be increased, in the course of the year,
four millions. I have dwelt thus particularly on this
circumstance, because the whole of the suspicion, that
the magnitude of the bank loans were the cause of
the failure of its cash, seems to me to rest upon it.
The largeness of those loans was not the cause of the
guineas going from them, as has been ordinarily sup­
posed; it was the effect. Nothing could be more na­
tural than for the public to call that the cause, in this,
instance, which was the effect, and that the effect
which was the cause. In the case of private persons
it is often very justly said, that a man fails in his payrnents because he has lent so largely ; and it would
seem very strange to reply that this was not the case,
for that the man in question had found it necessary to
lend largely, because his cash failed him ; and that the
failure of the cash was the cause, and the lending
merely an effect. That, however, which could not
be affirmed of an individual, is true in the case of the
bank, and the circumstances which give occasion for
this peculiarity in our reasonings respecting that in­
stitution, are these tw o; first, the difficulty in obtain]ng a supply of guineas which the bank experiences,
a difficulty totally unknowm to individuals who draw
their guineas from the bank itself; and, secondly, the
Angular necessity under which the bank is placed of
maintaining at all times its notes.
It was thought by some, that the interference on
the part of the government and parliament was impro­
per, inasmuch as the bank ought not to have been
Federal Reserve Bank of St. Louis


prevented from continuing to pay in cash as long as it
had any remaining ability to do so. Every bank note,
it was urged, is a contract to pay money entered into
between the bank and the possessor of it, in conse­
quence of what has been deemed a valuable conside­
ration; and no authority of parliament ought, except
in a case of the last necessity, to interpose itself to
prevent the fulfilment of such a contract. To this it
seems to be a fair answer to say, that the question is
not whether any one holder of a note shall have his
claim to receive monev for it interfered with, but that
it is a question respecting all the holders of notes, as
well as all other persons having a right to demand any
cash payments in any quarter whatever. Now, there
are few or no creditors who are not also debtors; and
a very large proportion of debtors owe as much to
others, as others owe to them. Bankers and traders
are greater debtors than other men; but they are also
greater creditors. The bank itself is a great creditor,
its credits, indeed, being far greater than its debts, and
it is entitled to receive a part of its debts almost im­
mediately. The case, then, is this: a comparatively
very small portion of the persons having a right to de­
mand cash, are led, by sudden alarm, to urge their
claim for guineas to such an extent as to invest even
a large portion of their capital in that article of which
a quantity has been provided which is sufficient only
for the purpose of the ordinary kind of payments. All
the cash in the world would not satisfy claims of this
sort, if all men, having a right to urge them, were
disposed equally to do so. The very persons who press
for these payments do not reflect, that they themselves,
perhaps, have creditors who might, with equal justice,
exact the immediate money payment of a still larger
Federal Reserve Bank of St. Louis


debt against them. The law authorising the suspen­
sion of the cash payments of the bank, seems, there­
fore, to have only, given effect to what must have been
the general wish of the nation in the new and extra­
ordinary circumstances in which it found itself. If
every bill and engagement is a contract to pay money,
the two parties to the contract may be understood as
agreeing, for the sake of a common and almost uni­
versal interest, to relax as to the literal interpretation
of it, and as consenting that “ money should mean
money’s worth,” and not the very pieces of metal:
and the parliament may be considered as interposing
in order to execute this common wish of the public.
By authorising the suspension of the cash payments
of the bank, while a certain quantity of guineas still
remained in its coffers, the parliament, moreover,
much diminished the shock which this extraordinary
.event might naturally be expected to occasion; and
also provided the means of furnishing the guineas ac­
tually necessary after that a:ra for some smaller cur­
rent payments, as well as the means of securing the
credit of bank notes, thus rendering them a more va­
luable medium of exchange for goods, and a fairer
substitute for guineas than they might otherwise have
been. The parliament, then, were led by the practi­
cal view which they took of the subject, to disregard
theory, as well as some popular prejudice, for the sake
°f more effectually guarding the public safety, and
promoting real justice.
The danger chiefly to be apprehended in London,
Was* that the common class of people, not receiving
their pay in the usual article of coin, and not knowing
at the first that one and two pound notes would purchase every thing in the same manner as gold, might
Federal Reserve Bank of St. Louis

be excited to some tumultuous proceedings. It was
also feared that, through the discredit cast on small
notes by the common people, this new paper might
fall, at the first issue of it, to a discount. It was
important, therefore, to continue for a time to pay
the labouring people in money; and to circulate the
new one and two pound notes, in the first instance,
by the medium of the higher classes. O f the sum
remaining in the bank, a small part was issued to each
of the bankers, after the suspension took place, for
the convenience of common workmen. It was ob­
viously desirable, that a farther sum should be reser­
ved in the bank as a provision for any subsequent and
important uses.
Immediately after this event, the bank extended
the quantity of its notes nearly to the amount of the
sum usually in circulation: and not only was credit
revived, but in no long time guineas became remark­
ably abundant. The bank, as is commonly supposed,
was replenished with them. And there is this infal­
lible proof, that gold flowed into the country; and that
the course of exchange became much in favour of it.
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C H A P T E R V.

O f the Balance o f Trade. O f the Course o f Exchange.
Tendency o f an unfavourable Exchange to take
away Gold. O f the Probability o f the Return o f
Gold. O f the Manner in which it may be supposed
that exported Gold is employed on the Continent.
Reasons fo r having renewed the Law fo r suspend­
ing the Cash Payments o f the Bank o f England.
H E law which authorised the suspension of the
cash payments of the bank having been re-enact­
ed; the high price of provisions having given occa­
sion to much speculation on the subject of paper cre­
dit; the course of exchange having again turned greatiy against the country; and gold having to a material
degree disappeared, its place being occupied by small
Paper notes; it is not surprising that suspicions of the
necessity of an alteration in the system of our paper
CJredit should have become prevalent. Some conside­
ration shall here be given to that unfavourable state
°f the exchange between this country and Europe,

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which operated during the last two years of the War,
in again drawing away our guineas.
It may be laid down as a general truth, that the
commercial exports and imports of a state (that is to
say, the exported and imported commodities, for which
one country receives an equivalent from another) na­
turally proportion themselves in some degree to each
othej, and that the balance of trade, therefore, (by
which is meant the difference between these commer­
cial exports and imports), cannot continue for a very
long time to be either highly favourable or highly un­
favourable to a country. For that balance must be
paid in bullion, or else must constitute a debt. To
suppose a very great balance to be paid, year after
year, in bullion, is to assume such a diminution of bul­
lion in one country, and such an accumulation of it in
another, as are not easy to be imagined: it may even
be questioned whether the commercial prosperity of
a state does not tend, on the whole, to reduce, rather
than augment, the quantity of gold in use, through
that extension of paper credit to which it leads. To
suppose large and successive balances to be formed
into a debt, is to assume an accumulation of debt,
which is almost equally incredible. A prosperous na­
tion commonly employs its growing wealth, not so
much in augmenting the debts due to it from abroad,
as in the enlargement of its capital at home ; I mean,
in the cultivation of its lands, in the increase of its
buildings, the extension of its machinery, the multi­
plication of its docks and its canals, and in a variety of
other improvements, which become the sure sources
of an increasing income. The state may be progres­
sive in these respects, even in years in which the ba­
lance of trade is unfavourable. There is a customary
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length of credit in foreign parts which the British ex­
porter, however overflowing his capital may be, is not
very willing to enlarge. And events fail not occasion­
ally to arise, which remind him of the danger of com­
mitting too great a portion of his property into the
hands of those who are net subject to the same laws
with himselfj and whose country may suddenly be in­
volved, at any moment, in a war with Great Britain.
The equalization of the commercial exports and im­
ports is promoted not only by the unwillingness of the
richer state to lend to an unlimited extent, but also
by a disinclination to borrow in the poorer. There is
in the mass of the people, of ail countries, a disposi­
tion to adapt their individual expenditure to their in­
come. Importations conducted with a view to the
consumption of the country into which the articles are
imported, (and such, perhaps, are the chief importa­
tions of a poor country), are limited by the ability of
the individuals of that country to pay for them out of
their income. Importations, with a view to subse­
quent exportation, are in like manner limited by the
ability to pay which subsists among the individuals of
the several countries to which the imported goods are
afterwards exported. The income of individuals is
the general limit in all cases. If, therefore, through
any unfortunate circumstance, if through war, scarci­
ty, or any other extensive calamity, the value of the
annual income of the inhabitants of a country is dimi­
nished, either new economy on the one hand, or new
Verrions of individual industry on the other, fail not,
after a certain time, in some measure, to restore the
balance. And this equality between private expen­
ditures and private incomes tends ultimately to pro13
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dace equality between the commercial exports and
But though the value of the commercial exports
and imports of a country will have this general ten­
dency to proportion themselves, to each other, there
will not fail occasionally to arise a very great inequa­
lity between them. A good or a bad harvest, in par­
ticular, will have a considerable influence in produ­
cing this temporary difference. The extra quantity of
corn and other articles imported into Great Britain in
this and the last year, with a view to supply the defi­
ciency of our own crops, must have amounted in va­
lue to so many millions, that it may justly excite sur­
prise that we should have been able, during an expen­
sive war, to provide the means of cancelling our fo­
reign debt so far even as we have done ; especially
when the peculiar interruptions to our commerce are
also considered. In this country, however, as in all
others, the two principles of economy and exertion
are always operating in proportion to the occasion for
them. But the economy and exertion follow rather
than accompany the evil which they have to cure. If
the harvest fails, and imports are necessary, in order
to supply the deficiency, payment for those imports is
almost immediately required: but the means of pay­
ment are to be supplied more gradually through the
limitation of private expenditure, or the increase of in­
dividual industry. Hence a temporary pressure arises
at the time of any very unfavourable balance. To un­
derstand how to provide against this pressure, and how
to encounter it, is a great part of the wisdom of a
commercial state.
By the commercial exports and imports which have
been spoken of, those articles have been intended for
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which an equivalent is given; not those which form
a remittance, for which nothing is obtained in exchange. Many of our exported and some of our im­
ported commodities are of that class which furnish no
For example, numerous stores were shipped, dur­
ing the war, for the support of our navy and army in
foreign parts. Remittances were made, in the way
of loan and subsidy, to our allies. Some dividends
may be supposed to have been transmitted to the fo­
reign proprietors of British stock. Much property is
also sent out of the kingdom, which constitutes a ca­
pital employed in the cultivation of lands in the W est
Indies. On the other hand, capital is transmitted to
Great Britain from the East Indies, both by the India
Company and by individuals.
Although exports and imports of this class form no
part of the commercial exports and imports which
have been spoken of, they affect the quantity of those
commercial exports and imports, and they contribute,
exactly like the circumstance of a bad harvest, to ren­
der the balance of trade unfavourable
they tend,*

* T his point may be illustrated in the follow ing manner s—
Let us suppose a subsidy, for example, o f two millions to be remitted
to the Emperor of Germany, through the medium of bills to that amount,
directed to be drawn by Vienna on London. By these bills, Great Bri­
tain is laid under a necessity o f exporting two millions, either o f goods or
o f bullion, or o f both, for which no foreign commodities will be given in
return. These two millions o f exports diminish our fund o f exporiable
goods ; and they also satisfy a part of the foreign demand for Biitish artiticles. T hey tend, in both these respects, to reduce the quantity o f goods
which can be exported by us in the way of ordinary commerce, and to
turn the balance of trade against us. Capital transferred to our colonies,
dividends trandmittsd to foreigners, and articles shipped for the use o f our
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that is td say, in the same manner, to bring Great
Britain into debt to foreign countries, and to promote
the exportation of our bullion. Our mercantile ex­
ports and imports, nevertheless, by whatever means
they may be rendered disproportionate, necessarily be­
come in the long run, tolerably eq u al; for it is evi­
dent that there is a limit, both to the debt which fo­
reigners will permit British merchants to incur, and
also to the quantity of British bullion which is export­
Gold has been spoken of in this chapter as that ar­
ticle by which a balance of trade is discharged, and
not as itself constituting a commodity. Gold, howe­
ver, when exported and imported, may be considered
in the same light with all other commodities; for it is
an article of intrinsic value : its price, like that of other
commodities, rises and falls according to the propor­
tion between the supply and the demand ; it naturally
seeks, like them, that country in which it is the

fleets and armies, contribute in the same manner as foreign subsidies to
render the balance o f trade unfavourable.

It may be added, that articles

consumed at home, in the support o f similar fleets and armies, as well as
all other expenditure in Great Britain, must have the same general ten.
It may be worthy o f remark, that since an additional internal expendi­
ture, in the same manner as the rem ttance o f a subsidy to foreign parts,
contributes to an unfavourable balance o f trade, and therefore, also, to the
exportation o f our gold, it follow s, that, if the remittance o f a small subsidy tends to produce at home a large saving; if, for instance, it spares
the expense of maintaining a great naval and military force for the defence
o f our own island, through the continental diversion to which it leads, the
subsidy may conduce to render our balance o f trade more favourable ; and
may, on the whole, prevent rather than promote the exportation of our
coin— A circumstance which, in considering the policy o f furnishing au
a d to foreign allies, is not always taken into contemplation.
Federal Reserve Bank of St. Louis

dearest; and it is, in point of fact, like them, exported
by our merchants accordingly as the export or import
is likely to yield a profit. Some description of the
circumstances which cause the export of gold to be­
come a profitable speculation to the merchant may
serve to illustrate this subject.
When a bill is drawn by one country on another—
by Hamburgh, for instance, on London— it is sold (or
discounted) in the place in which it is drawn, to some
person in the same place; and the buyer or discounter
gives for the bill that article, whatever it may be,
which forms the current payment of the spot. This
article may consist either of gold or silver coin, or of
bank paper, or, which is much the same thing as bank
paper, of a credit in the books of some public bank.
Let us now suppose that the exporter of corn from
Hamburgh to London draws a bill for 100/. on Lon­
don, and offers it for sale on the Hamburgh Exchange
at the season when great exportations of corn to Lon­
don are taking place. The persons in Hamburgh
having occasion to buy bills are fewer, in such a ease,
than those who want to sell them ; and the price of
the bill, like that of any other article, fluctuates ac­
cording to the proportion subsisting between the sup­
ply and the demand. The disproportion, then, be­
tween the number of those persons at Hamburgh
who want to sell London bills for Hamburgh coin,
and the number of those who want to sell Hamburgh
°oin for London bills, causes the price of London bills
t° fail, and of Hamburgh coin to rise. Thus gold is
^aid to rise at Hamburgh; and the exchange between
-ondon and Hamburgh becomes unfavourable to
London. This fluctuation in the exchange will, in
first instance, be small.* It will be limited to that
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trifling sum which it costs to transport bullion from j
the one place to the other, so long as there is bullion to j
be transported. But let us now suppose the number
of Hamburgh bills on London, drawn for the payment
of the goods imported into the latter place, to be so
numerous, that the exportation of all the bullion w hich
is purchaseable in Great Britain, has not sufficed for
their payment. Gold coin, in this case, will be ex­
ported, being first melted down for the purpose. Coin
indeed, is not allowed to be exported from Great Bri­
tain, nor gold which has been melted down from coin,
an oath being required of every exporter of gold, that
the gold which he exports does not consist of guineas
which have been melted. There are, however, many
ways of escaping the law which imposes this oath.
T he law is dishonestly evaded either by the clandes­
tine exportation of guineas, no oath at all being taken;
or by taking a false oath; or by contriving that the
persons taking the oath shall be, in some degree, igno­
rant of the melting which has been practised. The ,
operation of the law is avoided without this dishones­
ty, through the exportation of gold which had been
turned, or had been about to be turned, to the pur­
poses of gilded and golden ornaments, the place of this
gold being supplied by gold melted down from coin.
The'state of the British law unquestionably serves to
discourage and limit, though not effectually to hinder,
that exportation of guineas which is encouraged by an
unfavourable balance of trade ; and, perhaps, scarcely
lessens it, when the profit on exportation becomes
very great. The law tends, indeed, to produce 3
greater interchange of gold for paper at home. But it
increases whatever evil arises from an unfavourable
state of the exchange with foreign countries.
Federal Reserve Bank of St. Louis


L et it now be considered how this high price of
gold in London must operate in respect to the Bank
of England. Great demands for guineas will be made
on the bank; and, in general, probably by persons not
intending to melt or export guineas themselves, but
wishing only to supply that want which all have be­
gun to experience in consequence of the large illicit
exportations carried on by a few unknown persons. It
is assumed, for the present, that the bank is paying in
guineas. What, then, is the course which the bank
will naturally pursue ? Finding the guineas in their
coffers to lessen everyday, they must naturally be sup­
posed to be desirous of replacing them by all effectual
and not extravagantly expensive means. They will
be disposed, to a certain degree, to buy gold, though
at a losing price, and to coin it into new guineas; but
they will have to do this at the very moment when
many are privately melting what is coined. The one
party will be melting and selling, while the other is
buying and coining. And each of these two contendJng businesses will now be carried on not on account
of an actual exportation of each melted guinea to
Hamburgh, but the operation (or, at least, a great part
of it) will be confined to London; the coiners and the
melters living on the same spot, and giving constant
employment to each other.
I he bank, if we suppose it, as w'e now do, to carry
°n this sort of contest with the melters, is obviously
Paging a very unequal war; and even though it should
not be tired early, it will be likely to be tired sooner
*han its adversaries.
Fhe dilemma in which the bank is thus placed, is
evidently one which implies no deficiency in its wealth,
m its credit, or in the strength of its resources. The
Federal Reserve Bank of St. Louis


public, during all this time, may have the highest con­
fidence in it. The notes of the bank may be of the
same number as usual, possibly somewhat lower in
num ber; its capital and savings may be immensely
great, and perfectly well known; its stock may be
selling at much above par; its clear annual profits
may be considerable. Its gold, nevertheless, through
the operation of that one cause which has just been
named, may be growing less and less. And it is not
at all impossible, if an alarm at home should draw
away the gold at the same time, that, however ample
its general fund may have been, it may be reduced to
its last guinea; and may actually be brought under the
necessity of making a temporary suspension of its pay­
An important subject of inquiry here suggests
itself. Dr. Smith, as was remarked in the beginning
of the former chapter, in some degree leads his reader
to assume the Bank of England to be in fault (that is
to have issued too many notes) whenever an excess of
the market price above the mint price of gold takes
place, an excess which produces, as shall immediately
be shewn, that difficulty in replenishing the coffers of
the bank which has been recently described. If the
observation of Dr. Smith be, without exception or
qualification, true, then the quantity of paper issued
by the Bank of England has undoubtedly been exces­
sive throughout the last two years; for the excess ot
the market price above the mint price of gold has been,
during that time, considerable. Then, also, it is the
bank which has placed in its own way that obstacle to
the purchase of gold which has been spoken of. Any
inquiry tending to indicate the causes which place the
Federal Reserve Bank of St. Louis


bank under this singular difficulty, seems to be impor­
I shall here endeavour clearly to explain what is
meant by the high and the low price of gold; and also
by that difference between the mint price and the
market price, which has such material consequences.
Gold must be considered as dear, in proportion as
goods tor which it is exchangeable are cheap ; and as
cheap, in proportion as goods are dear. Any circum­
stance, therefore, which serves to make goods gene­
rally dear, must serve to make gold generally cheap,
and vice versa ; and any circumstance which serves to
make goods dear at any particular time or place, must
serve to make gold cheap at that time or place, and
vice vei'sa.
The reason cf the difference between the mint
price and the market price of gold, docs not easily oc­
cur. I f the bank, from time to time, buys gold at a
high price, that is, if it gives for gold a large quantity
of goods (or something convertible into a large quan­
tity, which is the same thing); it is natural, on the
first view, to suppose that the high price given by the
bank, which is the principal and almost the only
English purchaser, must form the current English
price ; and that this high current price of gold in Eng­
land will prove the means both of bringing it hither,
^nd of detaining it here; causing goods, which are
cheap, to go abroad ; and gold, which is dear, to come
hither, and also to remain in the country. Undoubted­
ly gold would remain in England, when tempted
hither by the high price given for it by the bank, if it
were not for the following circumstance. Gold is
bought by the bank, in order to be converted into
coin, and, when turned into coin, it forms a part 14
Federal Reserve Bank of St. Louis


of the circulating medium of the country, paper
constituting another part. If, then, this paper is
by any means rendered cheap, and if the paper
so rendered cheap is currently interchanged for
one sort of gold, namely, for gold which has been
coined, then the coined gold will partake in the cheap­
ness of the paper; that is, it will buy, when in the
shape of coin, a smaller quantity of goods than it will
purchase when in the form of bullion. In other words
an ounce of gold coming from the mint in the shape of
guineas, and making 3/. 17.?. 10-Lrf. (for that is the sum
into which an ounce always is coined at the mint),
will be worth less than the same ounce of gold was
worth before it went to the mint, and less than it
would again be worth if converted back into bullion.
There arises, therefore, a temptation to convert back
into bullion, and then-to export; or, which is the same
thing, to export, and then convert back into bullion;
or, which is also the same thing, to convert back into
bullion, and then sell to the bank, at the price which
would be obtained by exportation, that gold which
the bank had turned from bullion into coin. In pro- .
portion as the difficulty of collecting, melting, and
sending abroad the gold coin is augmented (and it in­
creases as the quantity of coin diminishes), the diffe­
rence between the mint and market price of bullion
will become more considerable, supposing the demand
for gold in foreign countries to continue. Thus it is
through the interchangeableness ot gold coin with pa­
per, that gold coin is made cheap in England, or, in
other words, that goods, in comparison with gold coin,
are made dear. The goods which are dear remain,
therefore, in England; and the gold coin, which is
cheap (for the bank is indisposed to buy it, on account
loss sustained on each coinage), goes abroad.
Federal Reserve Bank of St. Louis


There is, undoubtedly, much ground for the suppo­
sition of Dr. Smith, that a diminution of the quantity
of paper has a tendency to cure this evil.* It tends
to render the paper more valuable, and, therefore, to
make that gold coin more valuable for which the paper
is interchangeable, and thus to destroy that excess of
the market price above the mint price of gold, which
forms the obstacle to the introduction of a supply of
gold into the coffers of the bank. There seems, ne­
vertheless, to be much of inaccuracy and error in the
doctrine of Dr. Smith on this subject. He begins by
representing the quantity of paper which may properly
circulate, as to be measured by that of the gold which
would circulate if there were no paper. The reader
is, therefore, led to believe, that a difference between
the mint price and the market price of gold arises from
an issue of a greater quantity. Dr. Smith also too
much countenances an idea, that the excess consists

* T hat the diminution o f the circulating paper has a tendency to bring
down the price o f goods at home, and to cause those goods to go abroad
for the sake o f a better market, was observed in the preceding chapter,
and will again be insisted on when we proceed to treat of the importance
o f properly limiting the quantity o f Bank o f England notes. Many re­
marks, however, were added, in the former chapter, respecting those de­
trimental effects o f a reduction of paper, which aie to be set against the
good consequences of it. In the present chapter the same arguments, on
each side, are about to recur, and they w ill, therefore, be but slightly
touched upon.
In the former chapter, the difficulties which the b ink experiences in
consequence of a run occasioned by an alarm, were chiefly considcied ; in
the present, the difficulties arising from that soit of drain which proceeds
f'om an unfavourable balance o f tiade are investigated. In some future
Chapters, the d.fficulties to which the bank is exposed by a similar drain,
resulting from a too great emission of paper, will be the subject of exami­

Federal Reserve Bank of St. Louis

of paper forced into circulation ; for he terms the pro­
per quantity that paper which will “ easily circulate.”
H e, moreover, induces his reader to suppose, that the
excessive issue is an issue to a more than usual
amount. At the time of a very unfavourable balance
of trade (an event which Dr. Smith leaves totally out
of his consideration), it is very possible, as I appre­
hend, that the excess of paper, if such it is to be called,
is merely an excess above that very low and reduced
quantity to which it is necessary that it should be
brought down, in order to prevent the existence of an
excess of the market price above the mint price of
gold. I conceive, therefore, that this excess, if it
arises on the occasion of an unfavourable balance of
trade, and at a time when there has been no extraor­
dinary emission of notes, may fairly be considered as
an excess created by that unfavourable balance, though
it is one which a reduction of notes tends to cure.
The fair statement of the case seems to be this.
A t the time of a very unfavourable balance (produced,
for example, through a failure of the harvest), a coun­
try has occasion for large supplies of corn from abroad:
but either it has not the means of supplying at the in­
stant a sufficient quantity of goods in return, or, which
is much the more probable case, and the case which
I suppose more applicable to England, the goods which
the country having the unfavourable balance is able to
furnish as means of cancelling its debt, are not in such
demand abroad as to afford the prospect of a tempting
or even of a tolerable price; and this want of a de­
mand may happen possibly through some political
circumstance which has produced, in a particular quar­
ter, the temporary interruption of an established
branch of commerce. The country, therefore, which
Federal Reserve Bank of St. Louis


has the favourable balance, being, to a certain degree,
eager for payment, but not in immediate want of all
that supply of goods which would be necessary to pay
the balance, prefers gold as part, at least, of the pavment ; for gold can always be turned to a more bene­
ficial use than a very great overplus of any other com­
modity. In order, then, to induce the country having
the favourable balance to take all its payment in
goods, and no part of it in gold, it would be requisite
not only to prevent goods from being very dear, but
even to render them excessively cheap. It would be
necessary, therefore, that the bank should, not only
not increase its paper, but that it should, perhaps, ve­
ry greatly diminish it, if it would endeavour to prevent
gold from going out in part of payment of the unfa­
vourable balance. And if the bank do this, then there
will arise those other questions, which Dr. Smith
leaves totally out of his consideration; namely, whe­
ther the bank, in the attempt to produce this very
low price, may not, in a country circumstanced as
Great Britain is, so exceedingly distress trade and
discourage manufactures as to impair, in the manner
already specified, those sources of our returning wealth
to which we must chiefiy trust for the restoration of
our balance of trade, and for bringing back the tide of
gold into Great Britain. It is also necessary to notice
in this place, that the favourable effect which a limi­
tation of bank paper produces on the exchange is cer­
tainly not instantaneous, and may, probably, only be
experienced after some considerable interval of time ;
tt may, therefore, in many cases, be expected that the
exchange will rectify itself before the reduction of
bank paper can have any operation. It is also to be
recollected (a point, indeed, which Dr. Smith hirnseh
Federal Reserve Bank of St. Louis


states), that gold is retained or drawn away, not by the
limitation or the increase of the Bank of England pa­
per alone, but by that of their paper, conjointly with
that of the other paper of the country. The bank paper serves, it is true, to regulate, in a great degree,
that other paper; but not with exactness. The bank,
by proceeding to that reduction of its own paper
which is necessary to bring gold into the country, may
possibly annihilate, before it is aware, a part or even
almost the w'hole of the circulating country bank rotes,
and much other paper also; and it may, in that case,
have to supply gold sufficient to fill the whole void,
perhaps more than the whole void, which it has
created; for it may be called upon to furnish large
additional sums which may forthwith be hoarded in
consequence of the alarm thus occasioned. Hence,
even though it should increase the supply of gold
from abroad; it may augment, in a far greater de­
gree, the demand for it at home. For this reason,
it may be the true policy and duty of the bank to per­
mit, for a time, and to a certain extent, the continu­
ance of that unfavourable exchange, which causes
gold to leave the country, and to be drawn out of its
own coffers: and it must, in that case, necessarily in­
crease its loans to the same extent to which its gold
is diminished. The bank, however, ought generally
to be provided with a fund of gold so ample, as to en­
able it to pursue this line of conduct, with safety to it­
self, through the period of an unfavourable balance; a
period, the duration of which may, to a certain degree,
be estimated, though disappointment in a second har­
vest may cause much error in the calculation.
The more particular examination of this subject of
an unfavourable exchange, brings us, therefore, to the
Federal Reserve Bank of St. Louis

same conclusion to which we were led in the former
Chapter; namely, that the bank ought to avoid tod
contracted an issue of bank notes. The absence of
gold, though itself an evil, may prevent other evils of
greater moment; and may thus conduce, under certain
circumstances, to the good of the country. Our gold
has lately furnished the prompt payment for a part of
that corn, which has been necessary for our consump­
tion. The common manufacturer, if he understood
his own interest, would approve rather than complain
of the temporary substitution of paper tor gold, which
has been thus occasioned: for the export of gold has
served to ease him in the first instance: his labour, in­
deed, must hereafter purchase back again the gold
which has been exported, but he will have to buy it
back by exertions less severe than would otherwise
have been needful. The price of the goods which he
manufactures, and, consequently, the price also of his
own labour, is rendered somewhat higher by not
glutting the foreign market with a quantity of articles
altogether disproportionate to the demand. It should
farther be remembered, that gold is an unproductive
part of our capital: that the interest upon the sum
exported is so much saved to the country: and that
the export of gold serves, as far as it goes, to improve'
the exchange, by discharging the debt due on account
°f an unfavourable balance of trade; and to prevent
the depreciation of our own paper currency, as com­
pared with the current money payments of other
It may probably be thought that the exported gold
wdl not return. This subject may deserve a careful
mquiry. It should be observed, in the first place, that
m order to produce an improvement in the exchange,
Federal Reserve Bank of St. Louis


we have only to suppose the present degree of the
pressure fo r payment of goods imported to abate. It
may happen, for instance, that in consequence of
Hamburgh having become richer through the favour­
able harvest enjoyed in the surrounding countries, and
through the h'gh price obtained for its exported corn,
while Britain has become poorer; the antecedent cus­
tom of Hamburgh merchants being in debt to London
merchants may change, and a contrary custom may
become prevalent. If this new debt of London to
Hamburgh should be permitted to exist in the same
manner as the Hamburgh debt may be supposed to
have existed before, the exchange will not be affect­
ed by it.. The debt which affects the exchange is on­
ly that sort of debt, the payment of which is more or
less eagerly demanded. A country, therefore, seems
likely soon to arrive at a limit in this respect. It has
only to diminish not the debt itself, but the pressure
of the demand for payment, and the exchange begins
to mend. L et the two countries become equally sa­
tisfied to allow the debt to continue as it is, and the
exchange finds its level. Again; let the country in
debt prove itself to be somewhat more desirous to pay
its debt, a debt of course running at interest, than the
creditor country is to receive payment; and the ex­
change will be even in favour of the debtor country.
It .nay naturally be inquired what becomes of the
gold which has been supposed to go from this country
to Hamburgh; and how it comes to pass that it is
there demanded in such large quantities. When Bri­
tain has already spared out of its circulation, and out
of the cofLrs of its principal bank, many millions, per­
haps, of gold; whence happens it that Europe, having
only the same trade as before, uses all that is sent, and
Federal Reserve Bank of St. Louis


continues to cal], by means of the exchange, fora still
increasing supply ?
I understand that, at the period of every very fa­
vourable exchange to Hamburgh, most of the gold
poured in thither is melted down into the several sorts
of coin which are current on the continent; and that
it then becomes an article of remittance to various
places. It is, of course, remitted to those parts in
which the balance of trade with Hamburgh is unfa­
vourable to that city. Still, however, the difficulty
of accounting for the new and general demand for
gold seems to remain. The following considerations
may afford some solution of it. When the trade of
the world, or of many separate and considerable pla­
ces, is more than usually fluctuating, as in times of
political uncertainty or convulsion, it can hardly fail to
be, a larger quantity of gold is wanted than when
confidence is high, and when the several exports and
imports of different countries more nearly balance each
other. Gold, during any extraordinary irregularity in
trade between independent states, is the most com­
modious of all articles of remittance. It is a species
of return which Hamburgh, for instance, can send to
every place from which its spirit of speculation may
have called for articles of commerce. It is indeed, on­
ly the balance of the accounts which is paid in money;
hut, at different times, there may be balances of dif­
ferent sizes to be thus discharged. W hatever event,
therefore, so disturbs the course of trade over the
continent as to cause an increase in the balances of the
trade of independent countries, seems likely to cause
an augmentation of the general demand for gold. But
the general demand for gold is also affected by the de­
gree of confidence at the same time subsisting. It has

Federal Reserve Bank of St. Louis

been already shewn, that the quantity of gold requi­
site for the circulation of any single country may be
very different at different periods, and that the differ­
ence is proportioned to the degree of confidence be-'
tween man and man existing at the several seasons.
The quantity of gold wanted for the general trade of
the world may also fluctuate, in some degree, from
the same cause. It is however, likely also to vary
from a variation in the confidence subsisting betwe’en
independent countries. For the sake of illustration,
let us suppose that Hamburgh owes some town in
Prussia, one hundred miles distant, 100,000/. sterl­
ing, in consequence of an unfavourable balance of
trade occasioned by corn purchased there, and export­
ed by Hamburgh merchants to London; a balance
which, if the creditors in the Prussian town were wil­
ling to wait six months, would probably by that time
be repaid, and even more than repaid, through the
importation into the same town of W est India arti­
cles which Hamburgh would have received within
that period from Great Britain. If confidence is high,
the merchants of this town will be content, for the
sake, perhaps, of an addition of one per cent, to the
stipulated interest, to permit the debt to remain unex­
tinguished for the six months; and in this case the
course of exchange between the Prussian town and
Hamburgh will alter to the extent of one per cent.
But if, through the want of confidence subsisting be­
tween the Prussian town and Hamburgh, an addition
not of one, but of two per cent, to the current inter­
est should be considered to be the adequate compen­
sation for the risk incurred, the exchange will fluctu­
ate two per cent.; and a variation of two per cent, in
exchange will produce, let it be supposed, to the
Digitized for the
Federal Reserve Bank of St. Louis


Hamburgh debtors a greater loss than would be in­
curred by the expense of transporting 100,000/. in
gold to the Prussian town in question. Gold, is
therefore, in that case, transported. On the two cir­
cumstances, taken together, of the largeness of the
balance between the independent places, and the de­
gree of confidence subsisting between them, appears
to depend the quantity of bullion required. It seems,
therefore, by no means difficult to account for the
manner in which large quantities of gold exported
from this country may be employed on the continent
in seasons of general distrust, even though we should
not suppose any great portion to be hoarded.
Bullion to a very large amount was retained in the
Spanish settlements, during the latter period of the
war, through the fear of capture; and perhaps, there­
fore, we might trace in part the want of gold, of which
we have complained, to those successful exertions in
watching the ports of the enemy which have been
made by the British navy.
The immediate cause, however, of the exportation
of our coin has been an unfavourable exchange, pro­
duced partly by our heavy expenditure, though chiefly
by the superadded circumstance of two successively
bad harvests. When the recurrence of a favourable
balance of trade is long delayed, the fluctation of the
exchange may be expected to be not an immaterial
one. The exchange is, in some degree, sustained for
a time, which is thought likely to be short, through
the readiness of foreigners to speculate in i t ; hut pro­
tracted speculations of this sort do not equally answer,
Unless the fluctuation in the exchange is very consi­
derable. If, for example, a foreigner remits money
to London, at a period when the exchange has be­
Federal Reserve Bank of St. Louis


come unfavourable to England to the extent of three
per cent, places it at interest in the hands of a British
merchant, and draws for it in six months afterwards,
the exchange having by that time returned to its usual
level, he gains two and a half per cent, for half a year’s
interest on his money, and also three per cent, by
the course of exchange, which is 6ve and a half per
cent, in a half year, or eleven per cent, per annum.
But if the same foreigner remits money to England
when the exchange has, in like manner, varied three
per cent, and draws for it not in six months but in
two years, the exchange having returned to its usual
level only at the end of that long period, the foreigner
then gains ten per cent, interest on his money, and
three percent, by the exchange, or thirteen per cent,
in two years: that is to say, he gains in this case six
and a half per cent, per annum, but in the other ele­
ven per cent, per annum. If a variation of three per
cent, is supposed necessary to induce foreigners to
speculate for a period which is expected to end in six
months, a variation of no less than twelve per cent,
would be necessary to induce them to speculate for a
period which is expected to end in two years. The
improvement of our exchange with Europe having
been delayed through a second bad harvest, it is not
surprising that the expectation of its recovery within
a short time should have been weakened in the
minds of foreigners.
Indeed, many circumstances,
some of which have been already touched upon,* con-

* A mistaken idea o f the bank payments having been suspended through
the improper largeness o f i‘.g loans to government, and o f its resembling
the continental banks which have issued excessive quantities of paper for

the service o f their several governments, \yas befcre stated to be not un-
Federal Reserve Bank of St. Louis


curred, towards the conclusion of the war, in render­
ing our exchange unfavourable. Some gold, it may
be presumed, was retained in the bank coffers, which,
if the cash payments of that company had not been
suspended, would have found its way to foreign coun­
tries, and have contributed to remedy the existing
We depended chiefly, as will be shewn hereafter,
on the proper limitation of the quantity of our circu­
lating paper, though partly, also, on the degree of ex­
pectation which was kept up abroad of the future
improvement of our exchange; an expectation which
might be rendered greater or less by a variety of cir­
cumstances. Great Britain has had this great advan­
tage over those countries which are in the habit either
of depreciating their coin or of allowing a discount
on their paper, that they, in anticipating the return of
a more favourable state of their trade, look forward
only to a time when their uncertain and unstable rate
of exchange may be meliorated in a degree not easy
to be calculated; whereas we have anticipated a pe­
riod when an intrinsically valuable and specific stan­
dard would be restored, when our banks would be
obliged to pay fully in guineas containing the same

likely to have prevailed abroad, too much countenance having been given
in this country to such a sentiment. Foreigners, if such was their opi­
nion, would conceive that our exchange was a permanently declining one,
and that it would, therefore, answer better foi them to draw than to remit,
and to draw immediately than to deby drawing. T he idea that foreign
property might be seized in England, as an act o f retaliation for the Bri­
tish property seized in the north o f Europe, may also have had some influ­
ence. T he expectation o f seizures on each side would prejudice the ex­
change of whichever country was in debt, and the country ia debt hap­
pened to be Great Britain.
Federal Reserve Bank of St. Louis


weight of gold as before, and when our exchange,
therefore, might be expected completely to return to
its former level.
Undoubtedly, circumstances of so great and extra­
ordinary a nature may arise as to prevent the return of
gold at an early or assignable period. It may, howe­
ver, be safely affirmed, that when the main sources of
a country’s wealth are unim paired; when its popula­
tion, its industry, its manufacturing and trading capi­
tal, its general commerce, its credit, its colonial pos­
sessions, its political strength and independence, its
laws and constitution remain; and when, moreover,
its paper is confined within its accustomed bounds;
the absence of its gold, more especially if it be the ob­
vious consequence of one or more unfavourable sea­
sons, is an evil which is likely neither to be durable,
nor in any respect very important.
Under such circumstances, to alter materially the
old and accustomed system of paper credit, and, in
particular, to restrain in any very extraordinary degree
the issues of paper of more responsible banks, is to
deprive a country of those means of recovering itself
which it naturally possesses. 1 his seems to be the
fair inference from the observations which have been
stated in the present and preceding chapters. The
return of gold is to be promoted not so much by any
legislative measure directed to that immediate object,
as by cherishing the general industry, and attending to
the higher and more leading interests of the commu­
It may be proper here to add, that the experience
of past times, both of war and peace, leads us to sup­
pose, that the exchange between Great Britain and
countries is not likely to remain for any long
Federal Reserve Bank of St. Louis


period unfavourable to Great Britain. Experience has
likewise proved, that the return of gold has not been
precluded by the law which authorised the continu­
ance of the suspension of the cash payments of the
bank; for, while that law was in force, there occurred
one season during which gold flowed with a remark­
ably strong tide into the country.
It seems scarcely necessary now to dwell on the
reasons which evince that the repeal of the law in
question, in the last period of the war, would have
been inexpedient. It would have been to repeal it at
a time not a little resembling that in which the parli­
ament first thought proper to enact i t ; for it would
have been to repeal it when gold had been recently
drawn out of the country by an unfavourable ex­
change; and when we were subjected, as before, to
alarms of invasion. To have opened the bank would
have been, moreover, to have subjected it not only to
a demand for gold on these two accounts, but also to
such extra calls as might have arisen frem the anxiety
of the country banks to provide for the event of the
first opening more amply than might have been per­
manently necessary. The renewal, therefore, of the law
for suspending the cash payments of the bank stood
on the ground of the particular circumstances of the
times, and not on any principle which necessarily im­
plied the permanence or even the long continuance of
the suspension.
Federal Reserve Bank of St. Louis


C H A P T E R V I,

Error of imagining that Gold can be provided at the
Time of actual Distress. Reasons for not admit­
ting the Presumption that the Directors of the Bank
must have been to blamefor not making beforehand
a more adequate Provision.

H E impracticability of increasing the fund of
gold in the Bank of England, when an alarm at
home has already taken place, or even during the pe­
riod of a very unfavourable balance of trade, has been
manifested in the preceding pages.
There is a peculiar inconsistency in the supposition
that a country ought, at such a season, to take its mea­
sures for increasing the quantity of its gold. The
argument for such an attempt would run th u s: “ The
«« stock of gold has been in past time too low, as ap« pears by the experience of the present period j for
it is not now sufficient to supply what is neeessary
Federal Reserve Bank of St. Louis

“ for our own circulation, and to enable us also to pay
“ our unfavourable balance. We ought, therefore, to
u take due care that, in time to come, there shall
<f be a larger provision of gold in the country.” So
far, undoubtedly, there may be some general justice
in the reasoning. But if the further inference is
added, that we must, therefore, now begin to make the
provision, this is to propose to take measures to pro­
vide against a want, which is future and contingent,
at a time when that very want which we would pre­
vent is actually pressing upon us. With as fair an ap­
pearance of justice it might have been argued in re­
spect to the stock of corn in hand in the country—
“ The stock of corn has been, as now appears, for
“ some time too low; for it is, at the present season,
“ insufficient for the due supply of the country. We
u ought, therefore, to take care that, in time to come,
“ there shall be a better provision for such contingenu cies as the present.” So far, undoubtedly, there
might be justice in the observation. But to proceed
in our reasoning as to corn, in the same manner as is
sometimes done in respect to guineas, would be to
add— “ Therefore, now, while the scarcity is pressing
“ upon us, let us begin to make this provision; let us
“ instantly stock our granaries with a surplus quantity
of corn; let us divert the little grain which we pos,c sess from those most necessary uses to which it is
“ now destined. Let us increase our present diffi<f culty, in order that the country may be put, for the
“ future, out of the reach of the danger which it is
(c experiencing at the present hour.” The two cases
are not, indeed, precisely parallel; but there seems to
be sufficient resemblance to justify the elucidation.
There is, however, another ground on which the
Federal Reserve Bank of St. Louis


directors of the bank may possibly be thought censur­
able: that of having failed to supply themselves with
a sufficient quantity of gold at an antecedent period.
L et us, therefore, inquire whether the public has suf­
ficient reasons for entertaining this suspicion.
Let it be premised, that, since the directors of the
Bank of England can have no particular temptation to
improvidence; and since our national bank is, from its
very nature, liable to that accident which has lately,
for the first time, befallen it, a liability which, for ob ­
vious reasons, it may have been the custom too studi­
ously to conceal, there is not all that previous pre­
sumption of blame which might be supposed. There
can be no doubt that the credit of the Bank of Eng­
land has been, at all periods, most anxiously consulted
by its directors ; and that present profit has uniformly
been only the second consideration.
There are, however, certain limits which, even
when gold is most easily purchased, the bank naturally
prescribes to itself in respect to its stock of that arti­
cle. The amount of the disposeable effects of the
bank, on the 26th'*oT February, 1797, was stated un-‘
der three heads in a former place; and it was then ob­
served, that the only part of them which the bank
itself could enlarge was the deposits lodged in return
for bank notes issued. But even the bank notes can­
not safely be increased in a degree which is very con­
siderable. Indeed, experience has proved, that there
may be some sort of limit to the demand for them ;
for the applications for loans have often amounted,
during peace, to less than the bank has been disposed
to afford on the credit of good bills at the existing
rate of discount.
Let us, then, proceed to illustrate our subject by
Federal Reserve Bank of St. Louis


supposing the disposeable effects of the bank to have
usually stood, for some years antecedent to the suspen­
sion of its cash payments, at the sum of about nine­
teen millions, that is to say, let us allow them to have
been about a million and a half more than they
amounted to at that period.
It must not be imagined that these nineteen mil­
lions could, at any time, be with propriety invested in
gold. For the Bank of England, like every other
mercantile establishment, carries on its business on
such principles as will produce a profit. And the very
lowest profit which can serve as a sufficient induce­
ment to pursue the trade of banking, must be some­
what higher than the mere current interest of money.
Let us reckon this necessary profit of the bank to be
six per cent. The bank makes no more than three
per cent, interest on the capital subscribed by its mem­
bers, which is permanently lent to government. It
must, then, so manage its disposeable effects as to
gain an annual sum equal to an additional three per
cent, upon its own capital, that is, about 350,000/.
This it must do by lending out at interest a part of
the nineteen millions; and it must lend out, at in­
terest, a still farther part of it, both in order to defray
the annual charges of its establishment, and in order
also to furnish the means of paying those occasional
sums to government which are required as the price
of the renewal of its charter. It will be found, per­
haps, that not less than ten or twelve ol the nineteen
millions must be always at interest in order to provide
for these objects; and, consequently, that eight or
nine millions will have formed the highest average
sum which the bank can have kept in gold, consistently
with the acquisition of merely the necessary profit on
Federal Reserve Bank of St. Louis


'ts capital. But neither is it fair to suppose, that
these eight or nine millions ought to have been the
general or average sum kept in gold. The cash of
the bank fluctuates very greatly; and in order to se­
cure the keeping of cash and bullion to the average
amount of eight or nine millions, it will occasionally
have been necessary to keep twelve or fourteen mil­
lions, or possibly even more. This sum would be most
unreasonably large ; for, during the time when twelve
or fourteen millions are invested in gold, the bank,
instead of gaining six per cent, on its capital, will not
gain above three or four; and, moreover, it cannot ex­
actly know how long this extraordinary quantity of
gold may continue in its coffers. It certainly can ne­
ver count beforehand on those great reductions of cash
which may serve, by increasing the sum at interest,
to compensate for what is lost by a large detention of
bullion : for the reduction of cash happens not through
any measures taken by the bank, but in consequence
of events difficult to be foreseen, and, as has been al­
ready shewn, by no means easy to be controlled. The
bank, therefore, without impeachment of the charac­
ter of its directors, may be reasonably presumed to
have been at least somewhat indisposed to make in­
vestments in bullion, which, while they lasted, should
reduce its income very far below the necessary annual
Thus the bank, in endeavouring to secure w’hat has
been termed the necessary annual profit, would natu­
rally be led to make, on the w'hole, something more
than that profit; and, indeed, a variety of circum­
stances have lately occurred which have had a ten­
dency tovincrease its gains to a degree wdffch must
have been unexpected bv the bank itself. L et us,
Federal Reserve Bank of St. Louis

then, suppose that the profits which the bank, consi
dering all circumstances, may fairly and properly have
derived from its business for some years past, may
have been not six per cent, (which was spoken of as
the lowest sum necessary for carrying on the trade of
banking), but seven or eight per cent. Now seven
or eight per cent, or a little more, seems likely to be
that profit which the bank has, in point of fact, been
gaining. The dividends which it has paid to the pro­
prietors have been, for some time, seven per cent.;
and it has also added 3,800,000/. to its capital. This
addition has been accruing, no doubt, during a long
course of years. If we assume that it has accumu­
lated at the rate of about 116,000/. per annum, the
bank will have gained annually one per cent, on its
capital, besides the seven per cent, which has been
divided; if at 232,000/.* per annum, the bank will
have gained annually two per cent, on its capital, be
sides the seven per cent, which has been divided.
The bank, then, let it be supposed, has been gain­
ing eight or nine per cent, when seven or eight per
cent, is as much as it is reasonable that it should have
acquired. I have entered into this detail, which, in
various parts, may be somewhat erroneous, merely for
the sake of shewing that any proposed inquiry whe­
ther the quantity of gold kept by the bank may or
may not have been too small, must necessarily be
much narrower than many persons may imagine. A c­
cording to the supposition just made, it can relate only

• T h i s is to suppose that the savings o f the bank have been between
Sixteen and seventeen years in accumulating, a period certainly much too
short j but the accumulation must have been more rapid during the last
Federal Reserve Bank of St. Louis


to the propriety of a past annual gam of about one per
cent, or at most of two per cent, on the bank capital.
A gain of one per cent, would have been about
116,000/. per annum; and consequently the bank, by
taking this gain, have, on an average, kept a stock of
gold which has been smaller than it would otherwise
have possessed by about 2,300,000/. W hether this
sum of 2,300,000/. or whether any sum somewhat
greater than this, or somewhat short of it, ought or
ought not, in time past, to have been invested in gold
in addition to the sum which was invested, is a point
on which all that it seems safe to affirm with confidence,
is, that no person unacquainted with the affairs of the
bank can be capable of pronouncing any clear judge­
ment. There must have existed many arguments,
and some standing even on the ground of safety and
credit, against maintaining the additional fund which
has been mentioned.
I f the whole profits of the bank had been lately re­
stricted to seven per cent, they would have Leen
limited to that sum which the bank proprietors had
been for some time in the habit of receiving. They
would have been confined to a sum which would not
easily have admitted of accumulations. By obtaining
a higher profit the directors have secured to the pro­
prietors the continuation of the same regular dividend,
and have thus prevented that uncertainty which would
have encouraged gambling in bank stock. They have
also made, in the course of years, an important addi­
tion to their capital; an addition which has caused it
to maintain nearly an uniform proportion to the grow­
ing extent of the transactions of the bank, and to the
advancing commerce of the country; an addition also,
by the help of which they have lately lent to govern­
Federal Reserve Bank of St. Louis


ment three millions without interest, for a short term
of years, as the price of the renewal of their charter.
They have thus strengthened that security which the
creditors of the bank possess, so far as additional capi­
tal can strengthen it; and they will be able hereafter,
if it shall seem necessary, to invest in gold, in addition
to what they could otherwise have invested, a much
larger sum than they could with any propriety have so
invested in time past.
It must farther be borne in mind, that the necessity
under which the bank has been placed of providing
gold which is to fill the void occasioned by the disap­
pearing of country bank notes, has been, in part, a new
necessity, country bank notes not having circulated,
at remoter periods, in so great a degree as they have
lately ; and that the additional sum of two or even of
three or four millions would have been no security
against the effects of a general alarm in the countrv.
The fluctuation in the balance of trade with foreign
countries, which we experience, is also become, in
consequence of the greater extent of our population
and commerce, larger than heretofore. The scale of
all things having increased, the scale of this balance
may have increased also to a degree unexpected bv
the bank. A war, moreover, unprecedented as that
in which we have lately been engaged was not to be
anticipated; and the case of a succession of two bad
harvests, and of an importation of corn, amounting in
two years to the value of fifteen or twenty millions, is
felt by all to have been an extraordinary event. We
need not wonder, then, if events unforeseen by others,
were not foreseen by the Bank of England ; nor if for
unforeseen events an adequate provision was not at
Federal Reserve Bank of St. Louis

On the whole, it may be suggested to those who
cast blame on the bank for its improvidence in time
past, that they should consider well the several points
which have here been briefly pointed o u t; and that if,
afterwards, they continue to think the bank censura­
ble, they should ask themselves, before they become
the censurers, whether they are sure that, in taking
upon themselves the office, they exercise that can­
dour with which they would expect to be judged if
they had been themselves, during the late difficult
and trying period, directors of that institution.
It has already been observed, that, in that crisis
during which the conduct of the directors has been
more particularly known, they proceed, perhaps, with
too great fear and caution rather than with too little.
There seems, therefore, to be a presumption, that a
character, if not for caution, at least for tolerable pru­
dence, must have generally been their due. To say
the least, there appears to be no ground for charging
them with having acted in antecedent times on a di­
rectly opposite principle.
Federal Reserve Bank of St. Louis



Of Country Banks.

Their Advantages and Disad­

H E country banks in Great Britain appear to
have amounted, in the year 1797, to three hun­
dred and fifty-three. By a numeration taken in 1799,
they appear to have been three hundred and sixtysix. By a third numeration taken in 1800, they were
three hundred and eighty-six.* It seems, therefore,
that no material addition to their number has arisen in
these three years.
A great increase of country banks took place during
the time which intervened between the American and

* T his statement o f the number of country banks is taken from three
printed accounts o f them, the first of which may not have been very accu­
rate, but may be presumed to state them at too low rather than too high a
number. T he two later enumerations were made in
more careful


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the present war, and chiefly in the latter part of it ; a
period during which the trade, the agriculture, and the
population of the country must have advanced very
considerably. The circumstance of so many of our
country banks having originated at such a time, affords
a presumption that they are consequences and tokens
of the prosperity, rather than indications of the decli­
ning state of the country. No banks have arisen in
France during the period of its troubles, though seve­
ral attempts to erect them have been made. It was
with difficulty that any banks supported themselves in
America during the war ; but after the establishment
of peace, banks were instituted in most of the Ameri­
can states. They seem naturally to belong to all com­
mercial countries ; but are more particularly likely to
be multiplied in a state like ours, in which the mer­
cantile transactions are extended, the population is
great, and the expenditure of individuals considerable *
and where also a principal bank exists, which, through
the necessity imposed on it by its situation, undertakes
the task of providing a constant reservoir of gold ac­
cessible to every smaller banking establishment. The
creation of the large bank operates as a premium on
the institution of the smaller.
A description of the origin of one of our smaller
country banks may elucidate the subject before us.
In every town, and in many villages, there existed, an­
tecedently to the creation of what were afterwards
termed banks, some trader, manufacturer, or shop­
keeper, who acted, in many respects, as a banker to
the neighbourhood. The shopkeeper, for example,
being in the habit of drawing bills on London, and of
remitting bills thither, for the purposes of his own
trade, and receiving also much money at his shop,
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would occasionally give gold to his customers, taking
in return their bills on the metropolis, which were
mixed with his other bills, and sent to his London cor­
Persons who were not customers being also found
to want either money for bills, or bills for money, the
shopkeeper was led to charge something for his trou­
ble on accommodating them : and the trade of taking
and drawing bills being thus rendered profitable, it be­
came an object to increase it. For the sake of draw­
ing custom to his house, the shopkeeper, having as
yet possibly little or no view to the issuing of bank
notes, printed “ The Bank” over his door, and en­
graved these words on the checks on which he drew
his bills.
It may be assumed, also, to have been not uncom­
mon, before country banks were established, for the
principal shopkeeper in a town to take at interest
some of the money of his neighbours, on the condi­
tion, however, that he should not be required to pay
it back without some notice. The money thus depo­
sited with him, or borrowed by him (it is difficult to
say which term is the more proper), might either be
thrown into his trade, or employed in discounting bills
soon to become due ; but the latter would evidently
be the more safe and prudent way of investing it.
All these parts of the banking business arose out of
the situation and circumstances of the country; and
existed in many places before the name of banker was
The practice of issuing country bank notes, that is
to say, notes payable to the bearer on demand, may,
undoubtedly, be considered as a separate branch of bu­
siness. These notes, however, have been shown to
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be not so very different in their nature from other pa­
per as is commonly imagined.
For the sake of more particularly proving this point
let us advert to the nature of interest notes, a species
of paper which some country banks have issued to a
great extent. Even the shopkeeper, it was lately ob­
served, wrould take sums at interest. For each of
these sums, especially if he became a banker, he would
give out his note, in which would be expressed the
sum lent or deposited, the rate of interest upon it, and
the time which was to intervene before payment
could be demanded. This note would be transferable
to any third person. There would, however, be some
impediments to its circulation. The interest must
be calculated as often as it should change hands. Some
of the persons to whom it was offered might not be
disposed to accept it as a payment, especially if it had
a long time to run. Although these notes might cir­
culate, they would circulate heavily. In order to pro­
mote their circulation, and thus increase the whole
number of issuable notes, the banker would be in­
clined to lessen the time within which they should be
payable; and he would find that, in proportion as he
adopted this practice, a lower rate of interest on the
notes would suffice to induce persons to take them.
Notes carrying no interest would circulate, if due
within a short time, better than notes bearing interest
which should be due at a very distant period. But
the only notes which would circulate freely would be
those which should be payable, or at least paid, with­
out any notice. Some banks wishing, on the one
hand, to encourage the circulation of their paper, and,
on the other, to avoid the inconvenience of a strict ob­
ligation to pay without notice have issued notes pay
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able after a certain time, and yet have been in the re­
gular practice of giving money for them whenever
payment was demanded, and have taken no discount
for the accommodation.
Thus, then, the shorter the notice is, the greater
is the currency of the note; and in proportion, there­
fore, as the circumstances of a country render it more
safe for the banks to shorten their notice, in the same
proportion it may be expected that notes to the bear­
er on demand will be issued, and gold displaced.
Some speculative persons have imagined, that the
practice pursued by bankers of emitting notes payable
on demand is founded on an altogether vicious and
unwarrantable principle, inasmuch as such paper is
issued with a view to a profit which is to be obtained
only by lending out part of the sum necessary for the
payment. A number of promises, it is said, are thus
made, which the banker has evidently placed it out of
his power to perform, supposing the fulfilment of
them all to be required at the same time, an event by
no means impossible. This objection implies, that the
banker ought not, after receiving the deposits left
with him by his customers, to lend out part of the
sum necessary for the payment of those deposits; for
he is as much bound to discharge demands for depo­
sits without notice, as to pay without notice all his
notes. The Bank of England, the London banker,
the country banker, the merchant, and also the indi­
vidual of every class, proceed, in respect to all their
promises to pay money, not on any principle of moral
certainty, but on that of reasonable and sufficient pro­
bability. The objection to bank notes, as suck, if
pushed to that extent to which, if it is at all just, it
^ ig h t be carried, would apply to all verbal premises
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to pay money, and, indeed, to almost all promises
whatever; for there is scarcely any class of these for
the performance of which a perfectly sure provision
is always made at the time of giving the promise.
The objection, implies, therefore, that men ought to
be prohibited from acting in their commercial concerns
according to that rule of sufficient probability by which
all the other affairs of human life are conducted.*
It is completely understood by the holders of notes,
as well as by the customers of banks, that instant pay­
ment is provided for only a part of that sum which
may, by possibility, be demanded; and the banker,
therefore, seems fully justified if he makes such pro­
vision as the general and known usage of others in
the same profession (for he is supposed, by those who
trust him, to follow this usage), and a prudent regard
to all the circumstances of his own case teach him to
consider as sufficient.
The practice of issuing notes payable to bearer on
demand became very common a few years antecedent
to the present war, when various circumstances uni­
ted to encourage this part of the country banker’s
employment. Confidence was then high, the num­
ber of traders in the country had been greatly multi-

* In seme o f the democratic pamphlets o f the present day, bank notes
o f every kind are spoken o f not mertly as liable to be carried to excess,
or to be issued by irresponsible persons, or as producing particular evils,
but as radically and incurably vicious; they are considered in the light
o f a complete lraud upon the public, which is practised by the rich, and
connived at by the government ; and the very issue o f them has been
stigmatised as equivalent to the crime of forgery. T he resemblance o f
bank notes to other paper, and the resemblance o f a promise on paper to
any other promise, have been here touched upon with a view o f exposing
the absurdity of those doctrines.
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plied, the income and expenditure of individuals were
much increased, and every branch, therefore, of the
banking business had naturally enlarged itself. Some
addition had been made to the number of London
bankers; and a few of these took forward and active
measures to encourage the formation even of very
small banks in the country, with a view to the benefit
expected from a connexion with them. In many of
our great towns, a fair opening was afforded for the
erection of additional banks. These new establish­
ments having taken place, various country traders,
who had before made use of their own correspondents
in London, fell into the practice of transacting their
business with the metropolis through the medium of
the country banker with whom they kept their cash.
The country banker drew largely on a London banker
on the account of the country traders, and the Lon­
don banker was willing to execute the extensive coun­
try business which he thus acquired, in consideration
of a much lower commission than had before been
paid by the several country traders to their separate
correspondents in London, who had been, for the most
part, London merchants. The reduction of the rate
of commission arose from two causes: first, from fhe
new security which was afforded to the transactions
betv/een the town and the country, by the interposition
of the credit of rich and responsible country banks;
and, secondly, from the transfer to one house of that
labour of keeping accounts, writing letters, and re­
ceiving and paying bills, which had, before, been di­
vided among many. The risk and trouble being di­
minished, a proportionate abatement in the rate of
commission could be afforded.
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The multiplication even of country banks, purpo­
sing to deal chiefly in bills, would tend, in many ways,
to produce an increased issue of notes on demand.
Some deposit of gold would be kept by banks of eve­
ry class, with the view of satisfying the demands of
their customers; and the stock, maintained for this
purpose, would form a part of the necessary provision
for the payment of notes payable on demand, and it
would, therefore, become an encouragement to the
issue of them.
The multiplication of deposits of
gold through the country would, moreover, furnish,
in many cases, more prompt means of obtaining gold
on any sudden emergency; since one country bank
might often procure a supply from a neighbouring
one, especially if a good understanding on this sub­
ject should subsist between them. The establishment
of mail coaches afforded, at the same time, a more
cheap and ready method than before of bringing gold
from London, as well as of transmitting thither any
superfluity of it which might arise in the country. In
proportion to the facility of obtaining gold, the un­
productive stock of it kept in hand might be reduced;
or, if the same stock should be maintained, the issue
of notes payable on demand would be less hazardous.
Indeed, a few old and respectable country banks had
long been in the habit of emitting much paper of this
sort, and had seldom experienced any inconvenience
from doing it. The new ones, therefore, many of
which were not at all inferior in property to the old,
were led into the practice partly by example.
The circumstance which chiefly operated in procu­
ring currency to the new circulating paper, was that
participation of the benefit resulting from it which
was enjoyed by the customers of the country banker;
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for he lent among them the capital which was acqui­
red by the issue of his paper, and they became his
instruments in sending it into circulation, by accept­
ing it as a ready-inoney payment in return for bills
discounted. In consideration of their obligations to
the banker, and of the interest which they had in his
stability, they were also torward, on most occasions,
in the support of his credit. Such appear to have
been the chief circumstances which led to that great
increase of our country banks, and to that substitution
of paper in the place of gold, which have been, for
some years past, so much the subject of complaint.
In order to assist the reader in judging whether a
preponderance of good or of evil results from our nu­
merous country banks, an endeavour shall now be
made to enumerate the principal benefits as well as
inconveniences of them.
That country banks have, in a variety of respects,
been highly advantageous, can scarcely admit of a
doubt. They have afforded an accommodation to ma­
ny descriptions of persons; but more especially to
those who are engaged in commerce. They may be
regarded as an effect of that division of labour which
naturally takes place in every opulent country. The
receipts and the payments of money are now no longer
conducted at home, even by the middling trader, but
are become a separate branch of business in the hands
of bankers. It was to be expected that they to whom
this employment has been transferred would find
means of abridging labour, and of sparing the use of
coin, the most expensive circulating medium. By
their skill in attaining these objects, they transact an
important portion of the business of the trader at an
expense far inferior to that which he must incur were
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he to conduct it by his own clerks; and they derive a
profit to themselves, which, no less than the saving
to the customer, may be regarded as clear gain to the
Country banks are also useful by furnishing to ma­
ny persons the means of laying out at interest, and in
a safe manner, such money as they may have to spare.
Those banks, in particular, which give interest notes
for very small sums, afford to the middling and to the
lower class of people an encouragement to begin to
lay up property, and thus to make provision for the
time of sickness or old age. Country bai ks aho fur­
nish a very convenient method of distributing to one
class of men the superfluity of another. All who
have money to spare know where they can place it,
without expense or loss of time, not only in security,
but often with pecuniary advantage: and all commer­
cial persons of credit understand in what quarter they
can obtain such sums, in the way of loan, as their
circumstances will fairly warrant them in borrowing.
While country banks thus render a benefit of the first
magnitude to fair and prudent commerce, they are
important barriers against rash speculation, though not
unfrequently they are loudly accused of favouring it.
However some few banks may have subjected them­
selves to this charge, banks in general, and particu­
larly those which have been long established, take care
to lend the sums which have been deposited in their
hands, not to the imprudent speculator, or to the
spendthrift, by whom they are in danger of suffering
loss, but to those who, being known to possess some
wealth and to manage their concerns with prudence,
give proof that they are likely to repay the loan. Bor-rowers of this class are not apt to enter into very
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large and perilous undertakings- for they are unwil­
ling to risk the loss of their own capital. Bankers,
especially men of eminence* feel a special motive to
circumspection, in addition to that which operates
with other lenders. The banker always lends under
an impression that, if he places in any one a boundless
or immoderate confidence, the imprudence will ne­
cessarily be known, in case the borrower should fail,
as the affairs of every bankrupt are laid open to the
body of creditors* and that his rashness is, therefore,
liable to become the subject of conversation among
his customers. Indiscretion of this kind, even if the
particular instance be of no prominent magnitude,
may thus prove an occasion of injuring the character
and credit of the banking house, and of lessening the
general profits of the business.
The banker also enjoys, from the nature of his situa­
tion, very superior means of distinguishing the careful
trader from him who is improvident. The bill tran­
sactions of the neighbourhood pass under his view ;
the knowledge, thus obtained, aids his judgment*
and confidence may, therefore, be measured out by
him more nearly than by another person, in the pro­
portion in which ground for it exists. Through the
creation of banks, the appreciation of the credit of
numberless persons engaged in commerce has become
a science* and to the height to which this science is
now carried in Great Britain we are in no small de­
gree indebted for the flourishing state of our internal
commerce, for the general reputation of our merchants
abroad, and for the preference which in that respect
they enjoy over the traders of all other nations. It is
certainly the interest, and, I believe, it is also the ge­
neral practice, of banks to limit not only the loan
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which any one trader shall obtain from themselves,
but the total amount also, as far as they are able, of the
sum which the same person shall borrow in different
places; at the same time, reciprocally to communicate
intelligence for their mutual assistance ; and, above all,
to discourage bills of accommodation. While the trans­
actions of the surrounding traders are thus subject to
the view of the country'banks, those of the country
banks themselves come under the eye of their respec­
tive correspondents, the London bankers ; and in some
measure, likewise, of the Bank of England. The
Bank of England restricts, according to its discretion,
the credit given to the London banker. Thus a sys­
tem of checks is established, which, though certainly
very imperfect, answers many important purposes,
and, in particular, opposes many impediments to wild
Country banks, also, as well as the Bank of Eng­
land, have been highly beneficial, by adding, through
the issue of their paper, to the productive capital of
the country.* By this accession our manufactures,

# Dr. Smith remarks, that it is not by augmenting the capital o f the
country, but by rendering a greater part o f that capital active and produc­
tive than would otherwise be so, that the most judicious operations o f
banking can increase the industry o f the country. “ Dead stock,” be ob­
serves, “ is converted into active and productive stock.” Whether the
introduction of the use of paper is spoken of as turning dead and unpro­
ductive stock into stock which is active and productive, or as adding to
the stock of the country, is much the same thing. The less the stock o f
gold is, the greater will be the stock o f other kinds; and if a less stock
o f gold w ill, through the aid of paper, equally well perform the work of
a larger stock, it may be fail ly said that the use o f paper furnishes even
additional stock to the country.

T h u s, for example, the use of a new

sort o f machinery which costs less in the erection than that which wasern-
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unquestionably, have been very much extended, our
foreign trade has enlarged itself, and the landed in­
terest of the country has had a share of the benefit.
The common charge which is brought against coun­
try banks, of having raised up a fictitious capital in the
country, admits of the following answer. They have
substituted, it is true, much paper in the place of
gold: but the gold which has gone abroad has brought
back, as Dr. Smith observes, valuable commodities in
return. The guinea spared from circulation has con­
tributed to bring home the timber which has been
used in building, the iron or the steel which has been
instrumental to the purposes of machinery, and the
cotton and the wool which the hand of the manufac­
turer has worked up. The paper has thus given to
the country a bona fide capital which has been ex­
actly equal to the gold which it has caused to go
abroad ; and this additional capital has contributed, just
like any other part of the national stock, to give life to
It has lately been objected to paper credit, that, by
supplying the farmers with large loans, it has enabled
them to keep back their corn from the market and en­
hance the price. It is true, that farmers, both in the
last and many preceding years, may have obtained
larger loans than they would have procured if no coun­
try bank notes had existed. The capital so furnished
to the farmers may possibly have induced some of
them, at certain times, to keep in hand a larger quan-

oloyed before, and which just as effectually does the work required, since
•t enables the owner to have always more goods in the course of manu­
facture, while he has exactly the same means o f manufacturing them,
^ttght not improperly be described as adding to the stock o f the country.
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tity of grain than they would otherwise have found it
convenient to hold. We know, however, that the
general stock of grain in the autumn of 1800 was par­
ticularly low. Since, therefore, but a small part of
the capital of the farmers, whether borrowed or their
own, was then vested in grain, the principal share
would probably be laid out on their land, and would
increase its produce; for, unquestionably, the value
of a crop obtained from a farm depends chiefly on the
sum employed in cultivation and improvement. Coun­
try bank notes have thus added to the general supply
of grain ; and, by doing so, have contributed to pre­
vent a rise in its price: they have, probablv, in this
manner, afforded much more than a compensation for
any temporary advance in price to which they may
have given occasion by enabling farmers to keep a
larger quantity in hand. The very possession of a
large quantity in hand is to be considered as, in gene­
ral, a benefit rather than a disadvantage; for it is our
chief security against scarcity, and, consequently, also
against dearness. To the want of a larger surplus
stock at the end of the years 1799 and 1800 is to be
ascribed, in a great degree, the subsequent high price
of provisions. The tendency, therefore, of country
bank paper to increase generally the stock of grain in
the hands of the farmer is to be ranked among the ad­
vantages of country banks. The tendency to increase
it at the particular time of actual scarcity, is to be
classed among the evils which they produce; and it
is an inconsiderable evil, which is inseparable from a
great and extensive good. To those who are disposed
to magnify this occasional evil, it may be further ob­
served, that the farmer is enabled to enlarge his stock
by the increase of his own as well as of the general
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wealth, much more, no doubt, than by the share which
he obtains of that particular part of the new capital of
the kingdom which is created through the substitu­
tion of country bank notes for gold ; only a portion,
therefore, of the mischief complained of is to be refer­
red to country bank notes. It is principally to be
ascribed to the growing riches and prosperity both of
the farmers and other inhabitants of the countvv.
It is no small additional recommendation of the use
of our paper, that the public draws a large yearly re­
venue from the tax imposed on bills and notes. If
paper credit did not exist, a sum equal to that which
is thus raised must be supplied by taxes either burthening the industry, or paid out of the property of
the people. The publie has, since the late additional
tax, become a very considerable sharer in the profits
of the country bankers’ business.
Since, therefore, a paper medium has served the
purposes which have been described, and has been,
generally speaking, quite as convenient an instrument
in settling accounts as the gold which it has displaced,
the presumption in favour of its utility seems to be
very great; and, if it could be added, that no other
effects than those which have as yet been stated have
arisen or are likely to arise from it, the advantage of it
would be beyond dispute. To reproach it with be­
ing a merely fictitious thing, because it possesses not
the intrinsic value of gold, is to quarrel with it on ac­
count of that quality which is the very ground of its
merit. Its merit consists in the circumstance of its
costing almost nothing. By means of a very cheap
article the country has been, for some years, transact­
ing its money concerns, in which a very expensive
material had previously been employed. If this were
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the whole question, the substitution of paper for gold
would be as much to be approved as the introduction
of any other efficacious and very cheap instrument in
the place of a dear one. It would stand on the same
footing with the substitution, for example, of cast iron
for wrought iron or steel; of water carriage for land
carriage ; of a steam engine for the labour of men and
horses; and might claim a high rank among that mul­
titude of ingenious and economical contrivances to be
found among us, by the aid of which we have attained
to the present unrivalled state of our manufactures
and commerce.
Some very solid objections, however, may be urged
against the system of banking in the country.
The first which I shall mention, is, the tendency of
country banks to produce, occasionally, that general
failure of paper credit, and with .it that derangement
and suspension of commerce, as well as intermission
of manufacturing labour, which have been already
spoken of.
Country bank notes, and especially the smaller ones,
circulate, in a great measure, among people out of
trade, and pass occasionally into the hands of persons
of the lower class ; a great proportion, therefore, of the
holders of them, have few means of judging of the
comparative credit of the several issuers, and are com­
monly almost as ready to take the paper of any one
house calling itself a bank, as that of another. A cer­
tain degree of currency being thus given to inferior
paper, even the man who doubts the ultimate solven­
cy of the issuer is disposed to take i t , for the time
during which he intends to detain it is very short, and
his responsibility will cease almost as soon as he shall
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have parted with it.* Moreover, the amount of each
note is so small, that the risk seems, also, on that ac­
count, insignificant. The notes of the greater and of
the smaller country banks, thus obtaining, in ordinary
times, a nearly similar currency, they naturally fall at
a season of alarm into almost equal discredit. If any
one bank fails, a general run upon the neighbouring
ones is apt to take place, which, if not checked in the
beginning by pouring into the circulation a large quan­
tity of gold, leads to very extensive mischief. Many
country bankers, during a period of danger, prescribe
to themselves a principle of more than ordinary re­
serve in the issue of their notes, because they consi­
der these as the more vulnerable part of their credit.
They know that if the character of their house should
be brought into question, through the fears or even
the caprice of any of those strangers into whose hands
their circulating paper passes, some distrust may be
excited among their customers, the effect of which
may be a sudden demand for the payment of large de­
posits. The amount, therefore, of the country bank
notes circulating in the kingdom is liable to great
fluctuation. The country banker, in case of an alarm,
turns a part of the government securities, bills of ex­
change, or other property which he has in London,

• I apprehend that, supposing a country bank to fail, the holder o f one
of its notes, who should have parted with it in sufficient time to afford to
the next holder an opportunity o f applying for the d.scharge o f it before
the day of failure, could not be called upon for the payment of the value
o f it. T he responsibility, therefore, of him who has been the holder o f a
country bank note commonly ceases in about one or two days after it has
been parted with. That o f the holder o f a bill continues till after the bill
is due, namely, for a period, perhaps, of one or two months.
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into Bank of England notes, and those notes into mo
ney; and thus discharges many of his own circulating
notes, as well as enlarges the fund of gold in his cof­
fers. The Bank of England has, therefore, to supply
these occasional wants of the country banker ; and, in
order to be fully prepared to do this, it has, ordinarily,
to keep a quantity of gold equal to that of the notes
liable to be extinguished, as well as a quantity which
shall satisfy the other extraordinary demands which
may be made at the same season of consternation
either by banking houses, or by individuals. Thus
the country banker by no means bears his own bur­
then, while the Bank of England sustains a burthen
which is not its own, and which we may naturally
suppose that it does not very cheerfully endure.*
The national bank, indeed, may fairly be called up­
on, in consideration of the benefits enjoyed through
its monopoly, to submit to a considerable expense in
supplying gold for the country; but there must be
some bounds to the claims which can equitably be
made upon it: and, in estimating the benefit arising
to the kingdom from the use of country bank notes,
we have either to deduct the loss which the Bank of

• A t the time o f the distress of 1793 some great and opulent country banks
applied to the Bank o f England for aid, in the shape o f .discount, which
was refused on account of their not offering approved London securities:
gome immediate and important failures were the consequence. The Bank
o f England was indisposed to extend its aid to houses in the country.
The event, however, shewed that the relief o f the country was necessary
to the solvency of the metropolis. A sense of the unfairness o f the bur­
then cast on the bank by the large and sudden demands o f the banking
establishments in the country, probably contributed to produce an unwil­
lingness to grant them reiief.
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England incurs by maintaining an additional supply of
gold sufficient to answer the demands which they oc­
casion, or else we have to take into consideration the
risk which the bank incurs by only keeping a fund of
gold which is somewhat inadequate. The country
banks may, perhaps, cause the bank in some measure
to increase its general fund of gold, though not to
hold so much of this unproductive article as to afford
a security to that which the bank would enjoy if no
country bank notes existed.
It is obvious, that the additional capital given to the
kingdom through the use of country bank notes must
not be measured by the amount of those notes, but
that a deduction must be made of the sum kept in
gold in the coffers of the issuers, as their provision
for the occasional payments to which their bank paper
subjects them. The other deduction, which has been
spoken of, is of the same nature. It is a second de­
duction, which must be made on account of a similar,
and, perhaps, no less considerable provision for the
payment of country bank notes, which is rendered
necessary to be kept in the coffers of the Bank of
England. In other words, the capital given to the
country, through the use of country bank notes, is
only equal (and it was so stated in speaking of that
subject) to the amount of the gold which they cause
to be exported.
I shall endeavour here to explain more particularly
than has yet been done, some of those circumstances
which cause a great diminution of country bank notes
to bring distress on London, and to end in a general
failure of commercial credit.
In a former chapter it was observed, that when that
alarm among the common people, which produces an
Federal Reserve Bank of St. Louis


unwillingness to take country bank paper, and an ea­
gerness for gold has risen to a considerable height,
some distrust is apt to be excited among the higher
class of traders; and that any great want of confidence
in this quarter produces an increased demand for that
article, which is, among London bankers and mer­
chants, in much the same credit as gold; I mean
Bank of England notes, and which forms, at all times,
the only circulating medium of the metropolis in all
the larger transactions of its commerce. This more
than usual demand for Bank of England notes the
bank is at such a time particularly unwilling to satisfy,
for reasons which I shall endeavour fully to detail.
The reader will have been prepared to enter into them
by the observations on the subject of the bank, intro­
duced towards the close of the chapter which treated
of that institution.
First, the bank may be supposed to be unwilling to
satisfy that somewhat increased demand for its notes
which a season of consternation is apt to produce,
because it is not unlikely to partake, in some degree, in
the general alarm, especially since it must necessarily
be supposed to have already suffered, and to be still
experiencing a formidable reduction of the quantity
of its gold. The natural operation of even this gene­
ral sort of fear must be to incline it to contract its affairsj.and to diminish rather than enlarge its notes.
But it must also be recollected, that the bank has
necessarily been led already to increase its loans in the
same degree in which its gold has been reduced, pro­
vided it has maintained in circulation the accustomed
quantity of notes. This point was explained in the
chapter on the subject of the bank. The directors,
therefore, must seem to themselves to act with ex­
Federal Reserve Bank of St. Louis


traordinary liberality towards those who apply to them
for discounts, if they only go so far as to maintain the
usual, or nearly the usual, quantity of notes. The
liberality in lending which they must exercise, if,
when the gold is low, they even augment their paper,
must be very extended indeed.
In order to render this subject more clear, let us
suppose an extra demand on the Bank of England for
three millions of gold has been made through the ex­
tinction of the paper of country banks, and through
the slower circulation and hoarding of gold which
have attended the general alarm. Let us assume, al­
so, that the bank, during the time of its supplying
this gold, has thought proper to reduce its notes one
million. It will, in that case, have necessarily in­
creased its loans two millions. L et us further assume,
as we not very unreasonably may, that the two mil­
lions of additional loans have been afforded, not to the
government, who owe a large and standing sum to
the bank (suppose eight or ten millions besides the
bank capital), but exclusively to the merchants; and
let the total amount of loans antecedently afforded to
the merchants be reckoned at four millions. The
bank, in this case, will have raised its discounts to
the merchants from four millions to six; that is, it will
have increased them one half, even though it has di­
minished its notes one million. This extension of the
accustomed accommodation to the mercantile world
must appear to call for the thanks of that body, rather
than to leave any room for complaint; and yet it is
plain from reasoning, and, I believe, it might be also
proved from experience, that it will not ease the pres­
sure. The difficulties in London, notwithstanding
this additional loan of two millions to the merchants,
Federal Reserve Bank of St. Louis


will be somewhat increased; for a sum in gold, amounting to three millions, has been drawn from the
bank by the London agents of the country bankers
and traders, and has been sent by those agents into
the country. London, therefore, has furnished for the
country circulation three millions of gold; and it has
done this by getting discounted at the bank two addi­
tional millions of bills, for which it has received two
of the millions of gold, and by sparing one million of
its circulating notes as a means of obtaining the other
million. This reduction of the usual quantity of notes
is borne by the metropolis with peculiar difficulty at a
time of general alarm. However liberally, therefore,
the bankers and merchants may acknowledge them­
selves to have been already relieved by the bank, they
will repeat, and will even urge more than ever, their
application for discounts.
It may be observed, with a view to the further elucidation of this part of our subject, that both the
bank, and they who borrow of it, are naturally led to
fix their attention rather on the amount of the loans
furnished than on that of the notes in circulation.
The bank is used to allow to each borrower a sum
bearing some proportion to his supposed credit; but
seldom or never exceeding a certain amount. It is
true, the various borrowers do not always in an equal
degree avail themselves of their power of raising mo­
ney at the bank; and, therefore, a material enlarge­
ment of the sum total of the bank loans may take
place at a moment of difficulty, through the increased
use which some of the richer merchants then make
of their credit, as well as through the creation of a
few new borrowers at the bank. The directors also,
in particular cases, may suffer their rule to be relaxed.
Federal Reserve Bank of St. Louis


The circumstance, however, of the general principle
on which the bank ordinarily, and, indeed, naturally
proceeds, being that of a limitation of the amount of
each of its loans to individuals, must tend, as I con­
ceive, to place something like a general limit to the
total sum lent. It must conduce to prevent the fiuptuation in the bank loans from keeping pace with the
variation in the necessities of the public, and must
contribute to produce a reduction of notes at that sea­
son of extraordinary distrust, when the state of the
metropolis, as was more fully remarked in a former
part of this Work, calls rather for their increase.
That the borrowers at the bank are likely to pay
no attention to the subject of the total quantity of
notes in circulation, is easily shewn. They have, in­
deed, no means of knowing their amount. They can
only judge of the liberality of the bank by the extent
of its loans; and of this they form an imperfect esti­
mate by the sum which they or their connexions have
been able to obtain. Scarcely any one reflects, that
there may be a large increase of the general loans of
the bank, as well as possibly an extension ot each loan
to individuals, while there is a diminution of the num­
ber of bank notes; and that the amount of the notes,
not that of the loans, is the object on which the eye
should be fixed, in order to judge of the facility of ef­
fecting the payments of the metropolis.
It was remarked, in a former chapter, that the
bank, at the time antecedent to the suspension of its
cash payments, having diminished the sum lent by it
to government, and enlarged, though not in an equal
degree, that furnished to the merchants, the pressure
on the merchants was not relieved, as was expected,
by the increased loan afforded them, but even grevv
Federal Reserve Bank of St. Louis


more severe. It was also shewn, that this could not
fail to be the case, since the bank notes necessary for
effecting the current payments of the metropolis were
then diminished, and since the additional loans afforded
to the merchants only in part compensated for the
new pressure which was created in the general mo­
ney market of the kingdom, by the circumstance of
the government being obliged to become a great bor­
rower in that market. Whenever the bank materi­
ally lessens its paper, a similar pressure is likely to be
felt. Neither the transfer of the bank loans from the
government to the merchants, nor even a large in­
crease of its loans, when that increase is not carried so
far as is necessary to the maintenance of the accus­
tomed, or nearly the accustomed, quantity of bank
paper, can prevent, as I apprehend, distress in the me­
tropolis; and this distress soon communicates itself to
all parts of the kingdom. The short explanation of
the subject is this. Many country bank notes having
disappeared, a quantity of gold is called for, which is
so much new capital suddenly needed in the country.
The only place in which any supply of gold exists is
the Bank of England. Moreover, the only quarter
from whence the loan of the new capital, under all the
circumstances of the case, can come, is also the Bank
of England; for the gold in the bank is the only dead
or sleeping stock in the kingdom which is convertible
into the new active capital which is wanted. The
bank, therefore, mus-t laid, the gold which it furnishes;
it must lend, that is to say, to some individuals a sum
equal to the gold which other individuals have taken
from it: otherwise it does not relieve the country.
If it should be asked, Why does not the bank in
such case demand something intrinsically valuable, in­
Federal Reserve Bank of St. Louis


stead of contenting itself with mere paper in return ?—
the answer is, first, that if the bank were to receive
goods in exchange for its gold, or, in other words,
were to purchase goods, it would have afterwards to
sell them ; and it would then become a trading com­
pany, which it is forbid to be by its charter: it is al­
lowed to traffic only in bullion. The answer is, se­
condly, that if it were to take goods as a mere secu­
rity, and to detain them as such, it would then pre­
vent their passing into consumption with the desira­
ble expedition. By proceeding on eithei of these
plans, it would also involve itself in a degree of trou­
ble which would not be very consistent with the ma­
nagement of the business of a banking company.* I t
may be answered, thirdly, that the bills which the bank
discounts, are, generally speaking, so safe, that the se­
curity either of goods, or stocks, or land, none of
which are received in pledge by the directors, may be
considered as nearly superfluous. A very small pro­
portion of the five per cent, discount, gained upon the
bills turned into ready money at the bank, has com­
pensated, as I believe, for the whole of the loss upon
them, even in the years of the greatest commercial
failures which have yet been known.
The observations which have now been made suf­
ficiently shew what is the nature of that evil of which

* O f the parliamentary loan of exchequer bills in 1793, which was en­
acted to be granted on the security either of sufficient bonds men, or o f a
deposit o f goods, only a small proportion was taken on the latter principle,
0n account o f the great obstruction to the saleot goods, which was thought
*° arise from warehousing them on the account o f the commissioners apPointed by parliament. It has been already remarked, that no part of the
5unt lent was lost.

Federal Reserve Bank of St. Louis

we are speaking. It is an evil which ought to be
charged not to any fault in the mercantile body, but
to the defects of the banking system. It is a priva­
tion which the merchants occasionally experience of
a considerable part of that circulating medium which
custom has rendered essential to the punctual fulfil­
ment of their engagements. In good times, the coun­
try banks furnish this necessary article, which they
are enabled to do through the confidence of the peo­
ple in general3 but wdien an alarm arises, the country
banks cease to give it out, the people refusing what
they had before received; and the Bank of England,
the only body by whose interposition the distress can
be relieved, is somewhat unwilling to exercise all the
necessary liberality, for the reasons which have been
so fully mentioned. The merchants are some of the
chief sufferers, and they are generally, also, loaded
with no inconsiderable share of censure: but the
public, the country banks, and the Bank of England,
may more properly divide the blame.
The mischief produced by a general failure of pa­
per credit is very considerable. How much such a
failure interrupts trade and manufacturing industry,
and, therefore, ultimately also tends to carry gold out
of the country, has been already stated at large. It
also causes a great, though merely temporary, fall in
the market price of many sorts of property; and thus
inflicts a partial and very heavy loss on some traders,
and thrown extraordinary gain into the hands of others;
into the hands, I mean, of those who happen to have
superior powers of purchasing at the moment of dif­
ficulty. By giving to all banking, as well as mercan­
tile, transactions the appearance of perilous underta­
kings, it deters men of large property, and of a cau­
Federal Reserve Bank of St. Louis


tious temper, from following the profession of bankers
and merchants. It creates no small uneasiness of mind,
even among traders who surmount the difficulties of
the moment. Above all, it reduces many respectable,
prudent, and, ultimately, very solvent persons to the
mortifying necessity of stopping paym ent; thus
obliging them to share in that discredit, in which, it is
much to be desired, that traders of an opposite charac­
ter only should be involved. If, indeed, we suppose,
as we necessarily must, that, on account of the multi­
tude of failures which happen at the same time, the
discredit of them is much diminished, then another
evil is produced, which in a commercial country, is
very great. Acts of insolvency, leaving less stigma
on the character, become not so much dreaded as
might be wished. The case of some, who bring dif­
ficulties on themselves, being almost unavoidably con­
founded with that of persons whose affairs have been
involved through the entanglement of paper credit, to
stop payment is considered too much as a misfortune
or accident, and too little as a fault; and thus a prin­
cipal incentive to punctuality in mercantile payments
is weakened, and an important check to adventurous
speculation is in some measure lost.
The observations which have been made, will, how­
ever, shew that the tendency of country bank paper
to produce a general failure of paper credit, is an evil
which may be expected to diminish; for, first, if the
Bank of England, in future seasons of alarm, should
be disposed to extend its discounts in a greater degree
than heretofore, then the threatened calamity may be
averted through the generosity of that institution.*
* It is by no means intended to imply, that it would become the Bank
•if England to relieve every distress which the rashness o f country banks
Federal Reserve Bank of St. Louis


If, secondly, the country bankers should be taught
(as, in some degree, unquestionably they must), by
the difficulties which they have experienced, to pro-*
vide themselves with a larger quantity of that sort of
property which is quickly convertible into Bank of
England notes, and, therefore, also, into gold, then
the country bankers will have in their own hands a
greater power of checking the progress of an alarm.
Still, indeed, their resource will be the gold which is
in the bank. The increased promptitude, however,
with which the greater convertibility of their funds
will enable them to possess themselves of a part of
the bank treasure, will render a smaller supply of it
sufficient; and this smaller supply maybe expected
to be furnished, without difficulty, either by means of
such a trifling addition to the bank loans as the bank
will not refuse, or by sparing the necessary sum from
the paper circulation of the metropolis, which, if com­
mercial confidence is not impaired, will always admit
of some slight and temporary reduction. The Bank
o f England will itself profit by the circumstance of
its gold becoming more accessible to the country
banks; for the untoward event of a general failure of
paper credit will thus be rendered less probable, and,

may bring upon them : the bank, by doing this, might encourage their
improvidence. There seems to be a medium at which a public bank
should aim in granting aid to infer or establishments, and which it must
often find very difficult to be observed. T he relief should neither be so
prompt and liberal as to exempt those who misconduct their business
from all the natural consequences o f their fault, nor so scanty and slow
as deeply to involve the general interests. These interests, nevertheless,
are sure to be pieaded by every distressed person whose affairs are large,
however indifferent or even ruinous may be their state.
Federal Reserve Bank of St. Louis


therefore, a smaller stock of gold will be an equally
sufficient provision for the extraordinary demands at
home to which the bank will be subject. Or if,
thirdly, those among whom country bank notes cir­
culate should learn to be less variable as to the confi­
dence placed by them in country paper, or even to
appreciate more justly the several degrees of credit
due to the notes of different houses, then the evil
which was before supposed to be obviated by the li­
berality of the Bank of England, or by the prudence
of the country banker will abate through the growth
of confidence and the diffusion of commercial know ­
ledge among the public. It seems likely that by each
of these means, though especially in the second mode
which was mentioned, the tendency of country bank
notes to produce an occasional failure of commercial
credit will be diminished. In time past, the mischief
has been suffered to grow till it appeared too formi­
dable to be encountered; and this has happened part­
ly in consequence of our wanting that knowledge and
experience which we now possess.
Another evil attending the present banking system
in the country is the following.
The multiplication of country banks issuing small
notes to bearer on demand, by occasioning a great and
permanent diminution in our circulating coin, serves
to increase the danger, lest the standard by which the
value of our paper is intended to be at all times re­
gulated should occasionally not be maintained.
The evils of a great depreciation of paper curren­
cy are considerable. In proportion as the article
which forms the current payment for goods drops in.
value, the current price of goods rises. If the la­
Federal Reserve Bank of St. Louis


bourer receives only the same nominal wages as be­
fore the depreciation took place, he is underpaid.
Antecedent pecuniary contracts, though nominally,
and, perhaps, legally fulfilled, are not performed with
due equity. It is true, that the general stock of
wealth in the country may remain nearly the same ;
and it is possible that the circulating paper may be
restored to its full value when the period of the par­
ticular difficulty shall have passed by. Some degree,
however, of unfairness and inequality will, in the
mean time, have been produced, and much pressure
may have been felt by the lower classes of people,
whose wages are seldom raised until some time after
the occasion for a rise has begun to exist.
In those countries in which the government is the
chief banker or issuer of notes, a temptation arises,
on the occasion of every public pressure, either to
lessen the quantity of precious metal contained in the
chief current coin, as one of the means of detaining it
in the country, or to allow paper to pass at a conside­
rable and professed discount, which is another mode
of preventing the coin from being exported. These
are evils from which we consider ourselves as happily
secured by the established principles of good faith
which prevail in Great Britain. Those principles,
however, should, perhaps, lead us even to place our­
selves at a distance from that temptation to depreciate
coin, or to permit a discount on paper, to which so
many other countries have yielded. The possession,
in ordinary times, of a very considerable quantity of
gold, either in the bank or in general circulation, or
both, seems necessary for our complete security in
this respect. The substitution of country bank notes
for s:old tends to lessen that security. The evil of
Federal Reserve Bank of St. Louis


them is not that they create any false and merely ideal
riches, or that they do any constant prejudice to the
country. They enable the trader to vest a capital in
merchandise, which, without them, he would not
possess, and thereby add to the annual income of the
nation. In their immediate effect, therefore, they are
beneficial; but they leave us more exposed to an oc­
casional evil, against which it is prudent to guard,
provided we can accomplish that purpose without too
great a sacrifice of present advantages. It seems, on
this account, as well as on some others, very Undesi­
rable to render permanent the temporary law passed
some years since, and subsequently renewed, for the
purpose of permitting the issue of English notes un­
der five pounds. When it shall have expired, the
power of re-enacting it, which we shall possess,, will
be a valuable resource. If, moreover, any measure
can be devised, which, by increasing the public con­
fidence in good paper, will lessen the danger of a ge­
neral failure of paper credit, and of a run upon the
bank for gold, and which, also, by obstructing the is­
sue of five and ten pound notes by smaller and less
respectable banks, will somewhat extend the use of
coin, on the whole, it will have a twofold argument
to recommend it.*

* Various objections, however, occur against almost every parliamen­
tary measure for the regulation of country barks. D r. Smith is of
opinion, that a law prohibiting the issue of small notes is alone a suffici­
ent remedy for the evils attending these institutions, and that the danger
arising from banks is lessened by the mult plication o f them. It is the
object of this work not so much to canvass any question respecting the
particular means o f regulating paper credit, as to lay down some genera'
principles concerning it.
Federal Reserve Bank of St. Louis


The reader will observe, that even our circulating
gold com has here been considered in the light of a
provision against an unfavourable balance of trade with
foreign countries, and, therefore, as exportable. Part
° f ° ^ r C01n
in feet, always be exported when
the balance is very unfavourable, and the exportation,
under such circumstances, is beneficial to the coun­
try- W e are apt to think that it is the interchange of
the usual gold coin for paper at home which alone
maintains the value of our paper; and we are partly,
on this account, much more anxious to detain our
gold at home, than we are to discharge by means of
it an unfavourable balance of trade, and thereby to
improve our exchange with foreign countries. I ap­
prehend, however, that an unfavourable course of exchange, which the export of our gold would cure,
will, m many cases, tend much more to depreciate
our paper, and to produce a rise in the nominal price
of artides, than the want of the usual interchange of
gold for paper at home. Our coin itself, as has been
already remarked, when paper is depreciated, passes
not for what the gold in it is worth, but at the paper
price; though this is not generally observed to be the
case. It is the maintenance of our general exchan­
ges, or, in other words, it is the agreement of the
mint price with the bullion price of gold which seems
to be the true proof that the circulating paper is not
Federal Reserve Bank of St. Louis



Of the Tendency of a too great Issue of Bank Paper
to produce an Excess of the Market Price above the
Mint Price of Gold. Of the Means by which it
creates this Excess>namely, by its operation on the
Price of Goods and on the Course of Exchange.
Errors of Dr. A. Smith on the Subject of excessive
Paper. Of the Manner in which the Limitation of
the Quantity of the Bank of England Paper serves
to limit the Quantity and sustain the Value of all
the Paper of the Kingdom.
THIRD objection commonly made to country
banks, is, the influence which their notes are
supposed to have in raising the price of articles.
By the principles which shall be laid down in this
Chapter, I propose to prove, that, though a general
increase of paper has this tendency, the objection,
When applied to the paper of country banks, is par­
ticularly ill founded.


Federal Reserve Bank of St. Louis


It will be necessary, in the discussion which is now
■about to take place, to join the consideration of two
subjects, that of the influence which an enlarged emission of paper has in lifting up the price of com­
modities, and that of its influence, also, in producing
an excess of the market price above the mint price
of gold, and in thus exposing the bank to failure, and
the country to considerable inconvenience. It is
through the medium of the enhanced price of com­
modities that I conceive the ill effect on the mint
price of gold to be brought about.
The discussion of these topics will best be introdu­
ced by a statement of the principle which regulates
the value of all the articles of life.
The price of commodities in the market is formed
by means of a certain struggle which takes place be­
tween the buyers and the sellers. It is commonly
said, that the price of a thing is regulated by the
proportion between the supply and the demand. This
is, undoubtedly, true; and for the following reason.
If the supply of an article or the demand for it is great,
it is also known to be great; and if small, it is under­
stood to be small. When, therefore, the supply, for
example, is known to be less than the demand, the
sellers judge that the buyers are in some degree at
their mercy, and they insist on as favourable a price
as their power over the buyers is likely to enable them
to obtain. The price paid is not at all governed by
the equity of the ease, but entirely by the degree of
command which the one party has over the other.
When the demand is less than the supply, the buyers,
in their turn, in some degree, command the market»
giving not that sum which is calculated to indemnity
the seller against loss, but so much only as they think
Federal Reserve Bank of St. Louis


that the seller will accept rather than not sell his arti­
cle. The question of price is, therefore, in all cases,
a question of power, and of power only. It is obvi­
ous, that a rise in the price of a scarce commodity
will be more or less considerable in proportion as the
article is felt to be one of more or less strict necessi­
The principle which has been laid down as governing
the price of goods must be considered as also regulating
that of the paper for which they are sold; for it may as
properly be said, on the occasion of a sale of goods, that
paper is sold for goods, as that goods are sold for paper:
thus the sale of a single commodity, as it is called, is a
two-fold transaction, though not commonly understood
to be so: I mean, that the price at which the exchange
(or sale) takes place depends on t^vo facts; on the pro­
portion between the supply of the particular commo­
dity and the demand for it, which is one question;
and on the proportion, also, between the state of the
general supply of the circulating medium and that of
the demand for it, which is another.
Paper, moreover (of which I shall here speak as if
it were the only circulating medium, it being the on­
ly one used in the larger payments), is, to some per­
sons, somewhat in the same manner as bread is to all,
an article of necessity. It is necessary to traders, part­
ly because they have come under engagements to
make payments which are only to be effected by
means of their own previous receipts: and partly be­
cause they hold goods which must, within no long
time, be sold for money, that is to sav, for paper,
since a continually growing loss accrues from the de­
tention of them. Paper, therefore, must be bought
by the trader; and if there is a difficulty in obtaining
Federal Reserve Bank of St. Louis


it, the buyer of it is brought under the power of the
seller, and, in that case, more goods must be given
for it.
Let us, now, trace carefully the steps by which an
increase of paper serves to lift up the price of arti­
cles. Let us suppose, for example, an increased
number of Bank of England notes to be issued. In
such case the traders in the metropolis discover that
there is a more than usual facility of obtaining notes
at the bank by giving bills for them, and that they
may, therefore, rely on finding easy means of per­
forming any pecuniary engagements into which they
may enter. Every trader is encouraged by the know­
ledge of this facility of borrowing, a little to enlarge
his speculations; he is rendered by the plenty of mo­
ney, somewhat more ready to buy, and rather less
eager to sell; he either trusts that there will be a
particular profit on the article which is the object of
his speculation, or else he judges, that, by extending
his general purchases, he shall at least have his share
of the ordinary profit of commercial business, a pro­
fit which he considers to be proportioned to the quan­
tity of it. The opinion of an increased facility of ef­
fecting payments causes other traders to become great­
er buyers for the same reason, and at the same time.
Thus an inclination to buy is created in all quarters,
and an indisposition to sell. Now, since the cost of
articles depends on the issue of that general conflict
between the buyers and sellers, which was spoken of,
it follows, that any circumstance which serves to com­
municate a greater degree of eagerness to the mind
of the one party than to that of the other, will have
an influence on price. It is not necessary to suppose
either a monopoly, or a combination, or the least un­
Federal Reserve Bank of St. Louis


fairness, to exist, or even large and improper specula­
tions. The increase in the eagerness of each buyer
may be trifling. The zeal to buy, being generally
diffused, may, nevertheless, have a sensible operation
on price.
That, on the other hand, a reduction of the quan­
tity of paper causes a fall in the price of goods, is
scarcely necessary to be proved. It may be useful,
however, in some degree, to illustrate this point by
facts. I understand, that at the time of the great fai­
lure of paper credit in 1795, the price of corn fell, in
a few places, no less than twenty or thirty per cent.
The fall arose from the necessity of selling corn under
which some farmers were placed, in order to carry on
their payments. Much of the circulating medium
being withdrawn, the demand for it was in those
places far greater than the supply; and the few per­
sons, therefore, who were in possession of cash, or of
what would pass as cash, having command of the
market, obliged the farmers to sell at a price thus
greatly reduced. It was a new and sudden scarcity
of cash, not any new plenty of corn, which caused the
price of corn to drop.
It has been already observed, that some few days
antecedently to the suspension of the cash payments
of the bank, exchequer bills, as well as stocks, when
sold for ready money, that is to say, for bank notes,
fell in price. Not many days afterwards, although no
material event had occurred except that of the stop­
page of the bank, they rose. This fall and rise in the
price of government securities evidently did not re­
sult from any corresponding fluctuation in the national
confidence in them; for the fall took place when the
national credit would naturally be the highest, name
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3y, when the bank was as yet paying in cash, and the
approaching stoppage was not known; and the rise
happened when the national credit would be the lowest,
namely, within a few days after that discouraging
event. The reason of each of the fluctuations un*
questionably was the fluctuation in the quantity of the
Bank of England notes, which, as it has since ap­
peared, were, during the day or two which preceded
the suspension, about a million less than they were
either a short time before or a short time afterwards.
The notes being fewer during those few days, the price
of them was, at the same time, higher. It was, in
fact, therefore, the price of notes which rose, rather
than that of stocks which fell, on the days immedi­
ately preceding the suspension; and it was the price
of notes which a few days afterwards fell, rather than
that of stocks which rose.*

* In the event of any gi'eat public alarm, such, for instance, as that
which might be occasioned by the lan d n g in this country o f any conside­
rable body o f enemies, it is likely that the price of Bank of England notes
compared with that o f stocks, or other articles for which there ts a ready
money market, would in like manner rise, even though the quantity o f
paper should continue the same; this would happen in consequence o f
that increased demand for bank notes, to which it has been repeatedly o b ­
served that a state o f consternation aiwaj s gives occasion. Many bankers,
at such a time, would feel a doubt whether they might not be drawn upon
more largely than usual by some of their more timid customers; and whether,
also, they might not be subjected to more than common difficulty in sel­
ling government securities, an article which, in ordinary times, they are
used to turn into cash on the shortest notice, and which, while a prompt
sale of them is to be depended on, they prefer to bank notes, because an
interest is gained by holding the one, and not by detaining the other.
D u iin g the short crisis o f an invasion, the advantage of accruing in­
terest would be little regarded, and each banker, therefore, would


aa effort to exchange his exchequer bills, or, perhaps, his stocks, fo t
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I shall, for the present, consider the doctrine which
has been laid down, as being sufficiently established,
namely, that paper fluctuates in price on the same
principles as any other article, its value rising as its
quantity sinks, and v ice v e r s a ; or, in other words,
that an augmentation of it has a general tendency to
raise, and a diminished issue to lower, the nominal
cost of commodities, although, partly for reasons which
have been already touched upon, and partly for some
which shall be hereafter given, an exact correspon­
dence between the quantity of paper and the price
of commodities can by no means be expected always
to subsist.
The reader possibly may think that, in treating of
this subject, I have been mistaking the effect for the
cause, an increased issue of paper being, in his esti­
mation, merely a consequence which follows a rise in
the price of goods, and not the circumstance which
produces it. That an enlarged emission of paper may
often fairly be considered as only, or chiefly, an effect
of high prices, is not meant to be denied, it is, how?

Bank o f England notes, an effort which must prove generally ineffectual,
supposing the quantity issued to be the same ; but which, however, would
have the effect o f bringing down the comparative price of the article so
eagerly offered in exchange for notes. T hus the price of government se­
curities would appear to fall, when, in part at least, it would rather be the
price o f bank notes which should be said to rise. Some increase of the
bank issues seems very justifiable at such a time ; such an increase, I
mean, as should be sufficient only to prevent what may be termed aii un­
natural rise in the value o f bank notes. T his issue would be the means
o f preventing a misconception among the public respecting the degree of
distrust in government securities entertained by the dealers in them, a cir­
cumstance which might be of some political importance in a moment o:
general consternation.
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ever, intended to insist, that, unquestionably, in some
cases at ieast, the greater quantity of paper is, more
properly speaking, the cause. A fuller explanation
of this apparently difficult and disputable position will
be given in the further progress of this work.
I proceed in the next place to shew in what man­
ner a general rise in the cost of commodities, whether
proceeding from an extravagant issue of paper, or from
any other circumstance, contributes to produce an ex­
cess of the market price above the mint price of gold.
It is obvious, that, in proportion as goods are ren­
dered dear in Great Britain, the foreigner becomes un­
willing to buy them, the commodities of other coun­
tries which come into competition with our’s obtain­
ing a preference in the foreign market; and, there­
fore, that in consequence of a diminution of orders
from abroad, our exports will be diminished; unless
we assume, as we shall find it necessary to do, that
some compensation in the exchange is given to the
foreigner for the disadvantage attending the purchase
of our articles. But not only will our exports lessen
in the case supposed; our imports also will increase:
for the high British price of goods will tempt foreign
commodities to come in nearly in the same degree in
which it will discourage British articles from going
out. I mean only, that these two effects (that of a
diminished export, and that of an increased import)
will follow, provided that we suppose, wffiat is not
supposeable, namely, that, at the time when the price
of goods is greatly raised in Great Britain, the course
of exchange suffers no alteration. For the following
reason, I have said that this is not supposeable. Under
the circumstances which have been described of a di­
minished export, and an increased import, the balance
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of trade must unavoidably turn against us; the conse­
quence of which must be, that the drawers of bills on
Great Britain in foreign countries will become more
in number than the persons having occasion to remit
bills. This disparity between the number of individu­
als wanting to draw, and of those wanting to remit,
as was remarked in a former chapter, must produce a
fall in the price at which the overabundant bills on
England sell in the foreign market. The fall in the
selling price abroad of bills payable here, will operate
as an advantage to the foreign buyer of our commodi­
ties in the computation of the exchangeable value of
that circulating medium of his own country with
which he discharges the debt in Britain contracted by
his purchase. It will thus obviate the dearness of our
articles: it will serve as a compensation to the fo­
reigner for the loss which he would otherwise sus­
tain by buying in our market. The fall of our ex­
change will, therefore, promote exportation and en­
courage importation. It will, in a great degree, pre­
vent the high price of goods in Great Britain from
producing that unfavourable balance of trade, which,
for the sake of illustrating the subject, was supposed
to exist.
The compensation thus made to the foreigner for
the high British price of all articles is necessary as an
inducement to him to take them, somewhat in the
same manner as a drawback or bounty on exportation
ls the necessary inducement to take those particular
goods which have been rendered too dear for the foreign market by taxes laid on them in this country.
Jn each case the British consumer pays the high price,
and the foreigner is spared, because otherwise he will
accept our commodities.

4m W
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The fall in our exchange was just now defined to
be an advantage gained in the computation of the ex­
changeable value of that foreign circulating medium
with which the foreigner discharges his debt in Great
Britain, a debt paid in the circulating medium of this
country. It implies, therefore, a high valuation of
his circulating medium, and a low valuation of ours;
a low valuation, that is to say, both of our paper and
of the coin which is interchanged with it.
Now, when coin is thus rendered cheap, it by no
means follows that bullion is rendered cheap also.
Coin is rendered cheap through its constituting a part
of our circulating medium ; but bullion does not con­
stitute a part of it. Bullion is a commodity, and no­
thing but a commodity; and it rises and falls in value
on the same principle as all other commodities. It be­
comes, like them, dear in proportion as the circula­
ting medium for which it is exchanged is rendered cheap,
and cheap in proportion as the circulating medium is
rendered dear.
In the case, therefore, which has now been sup­
posed, we are to consider coin as sinking below its
proper and intrinsic worth, while bullion maintains its
natural and accustomed price. Hence there arises
that temptation, which was formerly noticed, either to
convert back into bullion and then to export; or,
which is the same thing, to export and then convert
back into bullion; or, which is also the same thing»
to convert back into bullion, and then sell to the bank,
at the price which would be gained by exportation,
that gold which the bank has purchased, and has con­
verted from bullion into coin.
In this manner an increase of paper, supposing l£
to be such as to raise the price of commodities in brl'
tain above the price at which, unless there is some al­
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lowance afforded in the course of exchange, they will
be received in foreign countries, contributes to pro­
duce an excess of the market price above the mint
price of gold, and to prevent, therefore, the introduc­
tion of a proper supply of it into the Bank of England,
as well as to draw out of its coffers, that coin which
the directors of the bank would wish to keep in them.
Dr. Smith appears to me to have treated the impor­
tant subject of the tendency of an excessive paper cir­
culation to send gold out of a country, and thus to
embarrass its banking establishments, in a manner
which is particularly defective and unsatisfactory. It
is true, that he blames the Bank of England for having
contributed to bring on itself, during several succes­
sive years, a great expence in buying gold through a
too great circulation of its paper; and that he also
charges the Scotch banks with having had, through
their excessive issues, a share in producing this evil.
Thus, therefore, he seems to give to his reader some
intimation of the tendency of an excessive issue of
paper to create an excess of the market price above
the mint price of gold.**
* “ By issuing too great a quantity o f paper, of which the excess was
“ continually returning in order to be exchanged for gold and silver, the
“ Bank o f England was, for many years together, obliged to coin gold
to the extent of between eight hundred thousand pounds and a million
“ a year. For this great coinage the bank (in consequence o f the worn and
“ degraded state into which the gold coin had fallen a few years ago) was
“ frequently obliged to purchase gold bullion at the high pi ice of 4/. an
ounce, which it soon after issued in coin at 3/. 17s. to jd . an ounce,
** losing, in this manner, between two and a half and three per cent.
“ Though the bank, therefore, paid no seignorage, though the govern“ tnent was properly at the expense o f the coinage, this liberality of go<l vernment did not prevent altogether the expence o f the hank.” — E n­
quiry into the Nature and Causes of the Wealth of Nations, by Dr. A ,
^niith, Vol. I. page 451, 4th edit. Oct.
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It appears, however, in some degree, from the pas­
sage in question, though much more clearly from
other parts of his work, that he considers every per­
manent excess, whether of the market price above
the mint price, or of the mint price above the market
price of gold, as entirely referable to “ something in
the state of the coin.*
In one place he remarks, that a high price of bul­
lion arises from the difference between the weight of
our more light and that of our more heavy guineas,
the value of the gold in the heavier guineas, as he re­
presents the case, determining the general current vaJue of both the lighter and the heavier pieces of coin;
and the superior quantity of gold in the heavier gui­
neas constituting, therefore, so much profit on the
melting of those heavier pieces :f a supposition ma-

* “ W hen the market price either o f gold or silver bullion continues
for several years together steadily and constantly either more or less
" above, or more or less below, the mint price, we may be assured that
“ this steady and constant either superiority or inferiority o f price is the
“ effect o f something in the state of the com, which, at that time, renu ders a certain quantity o f coin either of more value or o f less value
“ than the precise quantity o f bullion which it ought to contain.” —
Smith on the Wealth o f Nations, Vol. I. page 69, 4th edit. Oct.
f “ In every country the greater part o f the current coin is almost
“ always more or less worn or otherwise degenerated from its standard.
" In Great Britain, it was, before the late reformation, a good deal so,
" the gold being more than two per cent, and the silver more than eight
“ per cent, below its standard weight. But if forty-four guineas and a
11 half containing then full standard weight, a pound weight o f gold,
t( could purchase very little more than a pound weight o f uncoined gold,
“ forty-four guineas and a half wanting a part of their weight, could not
«« purchase a pound weight, and something was to be added, in order to
«< make up the deficiency.

The current price of gold bullion at maik«*»

“ therefore, instead of being the same with the mint price, or 46'. 14/. 6^*
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nîfestly erroneous, and contradicted by experience ^
for it implies that the excess of the market price above the mint price of gold* both never is and never
can be greater than the excess of the weight of the
heavier above the lighter guineas; and, also, that the
price of bullion cannot fluctuate while the state of our
coinage remains in all respects the same. We have
lately experienced fluctuations in our exchange, and
correspondent variations in the market price, compared
with the mint price of gold, amounting to no less than
eight or ten per cent, the state of our coinage con­
tinuing, in all respects, the same.
Dr. Smith recommends a seignorage, as tending to
raise the value both of the lighter and heavier coin ;
and thus, also, to diminish, if not destroy, the excess
of the market price above the mint price of gold.*
“ was then about 47/. 14^. and sometimes about 48/. W hen the greater
“ part o f the coin, however, was in this degenerate condition, forty-four
“ guineas and a half, fresh from the mint, would purchase no more
*• goods in the market than any other ordinary guineas; because, when
they come into the coffers o f the merchant, being confounded with
“ other money, they could not afterwards be distinguished, without
“ more trouble than the difference was worth. Like other guinea?, they
“ were worth no more than 46/. 14/. 6d. I f thrown into the melting
“ pot, however, they produced, without any sensible loss, a pound wt.
o f standard gold, w hich could be sold at any time for between 47/. 14*.
“ and 48/. either in gold or silver. There was an evident profit, there“ fore, in melting down new coined money ; and it was done so instan“ taneously, that no precaution o f government could prevent it. The
“ operations o f the mint were, upon this account, somewhat like the
u web o f Penelope ; the work that was done in the day was undone in
'* the night. T he mint was employed not so much in making daily ad<c ditions to the coin, as in replacing the very best part of it which was
“ daily melted dow n.”
* «« Were the private people to carry their gold and silver to the
** mint to pay themselves for the coinage, it would add to the value or
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It is remarkable, that this writer does not, in any
degree, advert either to that more immediate cause
(a fall of our exchanges), from which I have, in this
« those metals in the same manner as the fashion does to that o f plate.
« Coined gold and silver would be more valuable than uncoined. T he
“ seignorage, if it was not exorbitant, would add to the bullion the whole
“ value o f the duty, because the government having every where the ex“ elusive privilege of coining, no coin can come to market cheaper than
“ they think proper to afford it.
“ A seignorage w ill, in many cases, take away altogether, and will in
« all cases diminish the profit o f melting down the new coin.

T h is pro-

“ fit always arises from the difference between the quantity o f bullion
which the common currency ought to contain, and that which it actual­
l y does contain. I f this difference is less than the seignorage, there
“ will be loss instead o f profit. I f it is equal to the seignorage, there
** w ill neither be profit nor loss. I f it is greater than the seignorage,
“ there w ill, indeed, be some profit; but less than if there weie no
<* seignorage.”— Smith’s W ealth o f N ations, vol. ii. book iv. chap. vi.

pages 333» 334» and 335*
T hese observations of D r. Smith, on the subject o f a seignorage, seem
erroneous in the following respects. Plate, when bought, is purchased
in order not to be sold again, but to be retained by the possessor; and
the price paid by the original buyer may, theiefore, be not unfairly con­
sidered, as it is by Dr. Smith, to be the current price o f the article.
G old, on the contrary, is no sooner bought and coined, than it is sent
into circulation ; it is sold, that is to say (or exchanged for commodities),
again and again. W hat we mean, therefore, by the current price o f gold
ooin, is that price at which it passes, not in the original bargain for bul­
lion between the seller o f it and the bank, but in the general course of
this subsequent circulation. Guineas, moreover, not only circulate at
home, but are liable to be sent abroad in the event o f any unfavourable
balance o f trade. They are worih in that case, just as much as the fo ­
reign country will give for them; and the foreign country, in estimating
their value, since it means to melt them, does not at all take into its cal­
culation the expense of the coinage of the piece of metal. It acts like a
buyer not o f new bat o f old plate, who destines it to the melting pot,
and, therefore, refuses to allow any thing for “ the fashion.”
T h is foreign price o f cur coin principally determines the current valve
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as well as in a former chapter, described the excess in
question, as, in all cases, arising; or to that more re­
mote one on which I have lately dwelt, namely, a too
high price of goods, which produces a fall of our ex­
o f the price of coin in England.
lowing manner.

It appears to me to do this in the fol­

When the price which our coin will fetch in foreign countries is such
as to tempt it out of the kingdom, the diiectors o f the bank naturally
diminish, in some degree, the quantity of their paper, through an anxiety
for the safety o f their establishment. By diminishing their paper, they
raise its value ; and in raising its value, they raise also the value in E ng­
land o f the current coin which is exchanged for it. Thus the value o f
our gold coin conforms itself to the value of our current paper, and the
current paper is rendered by the bank directors of that value which it is
necessary that it should bear in order to prevent large exportations ; a
value sometimes rising a little above, and sometimes falling a little below,
the price which our coin bears abroad $ a price, in the formation of which
no regard is had to the fashion.
A seignorage, nevertheless, might add to the current value o f the coin
o f the kingdom for the following reason. It might incline the directors
o f the bank to improve the value of their paper by a stricter limitation of
it, for the sake of more effectually exempting themselves from an occa­
sional burthen, which is now borne for them by the government. T he
point below which they would wish to prevent their paper from falling
would still be the same as it is now, namely, the selling price o f our coin
when melted and carried to foreign countries: the care, however, which
they would take to prevent its falling below that price w ould, perhaps,
be greater, and would be such as to raise its average price, if, in the event
o f each depression, they should be subject not only, as they are now-, to
loss in the purchase of gold, but to a further loss in coining it. There
seems no reason, however, to suppose the the degree o f fluctuation
which is now apt to subsist between the market price and mint price of
gold could, by any efforts of the bank, be materially lessened. It re­
sults from the fluctuations in the exchange} and those fluctuations, in
general, proceed from variations in the markets o f Europe, which affect
the balance of trade, and cannot, by any management of bank paper, be
exactly counteracted.
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Dr. Smith does not, in any of his observations on
this subject, proceed sufficiently, as 1 conceive, on
the practical principle of shewing how it is through
the medium of prices (of the prices of goods in ge­
neral, and of bullion in particular, compared with the
price of the current circulating medium), that the ope­
rations of importing and exporting gold are brought
about. He considers our coin as going abroad simply
in consequence of our circulation at home being over
full. Payment in coin, according to his doctrine, is
demanded of every bank for as much of its paper as
is excessive, because the excessive paper can neither
be sent abroad nor turned to any use at home j
whereas, when it is changed into coin, the coin may
be transmitted to a foreign part, and may there be
advantageously employed.*•*
The reader will perceive that, according to the pria* 44 The coffers o f a banking company which issues more paper than
44 can be employed in the circulation of the country, and o f which the
“ excess is continually returning upon them for payment, though they
•* ought to be filled much fuller, yet must empty themselves much faster
** than if their business was confined within more reasonable bounds, and
44 must require not only a more violent but a more constant and uninter*
“ rupted exertion o f expense in order to replenish them. T he coin, too,
44 which is thus continually drawn in such large quantities from their cof44 fers cannot be employed in the circulation o f the country. It comes in
“ place o f a paper which is over and above what can be employed in that
“ circulation, and is, therefore, over and above what can be employed in
“ it too. But as that coin w ill not be allowed to lie idle, it must, in on*
** shape or another, be sent abroad, in order to find that profitable employ44 ment which it cannot find at home ; and this continual exportation of
“ gold and silver, by enhancing the difficulty, must necessarily enhance
44 still further the expense o f the bank in finding more gold and silver in
4‘ order to replenish those coffers which empty themselves so very rapid41 ly .’*—Vol. I . page 4JO.
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ciple which I have endeavoured to establish, coin does
not merely leave the country because, the circulation
being full, no use can be found at home for additional
circulating medium j but that every increase of paper
has been represented as enhancing the price of goods,
which advanced price of goods affords employment to
a larger quantity of circulating medium, so that the
circulation can never be said to be over full. This ad­
vanced price of goods is the same thing as a reduced
price of coin i the coin, therefore, in consequence of
its reduced price, is carried out of the country for the
sake of obtaining for it a better market. The heavier
pieces, undoubtedly, will be preferred, if there is a
facility of obtaining and transporting them ; but the
lighter guineas will also be exported, when the state
of the exchange shall be sufficiently low to afford a
profit on such a transaction. One of the consequences
of Dr. Smith’s mode of treating the subject, is, that
the reader is led into the error of thinking, that when,
through an excessive issue of paper, gold has been
made to flow away from us, the expense of restoring
it consists merely in the charge of collecting it and
transporting it from the place to which it is gone. It
follows, on the contrary, from the principles which I
have laid down, that, in order to bring back gold, the
expense not only of importing it may be to be incur­
red, but that also of purchasing it at a loss, and at a
loss which may be either more or less considerable:
a circumstance of great importance in the question.
If this loss should ever become extremely great, the
difficulties of restoring the value of our paper might
not easily be surmounted, and a current discount or
difference between the coin and paper of the country
'vould scarcely be avoidable.

Federal Reserve Bank of St. Louis


Dr. Smith indeed, represents the expense of bring'ing back gold as considerable; but he seems to im­
pute the greatness of it to the circumstance of its re­
curring again and again: and he describes it as conti­
nuing to recur in the case of each individual bank,
whether in town or country, which persists in the
false policy of issuing more paper than is sufficient to
fill the circulation of the neighbouring district. I shall
here take occasion to notice some great inaccuracies
in one part of his reasoning upon this point.
He says—“ A banking company which issues more
t( paper than can be employed in the circulation of
“ the country, and of which the excess is continually
“ returning upon them for payment, ought to increase
“ the quantity of gold and silver which they keep at
“ all times in their coffers, not only in proportion to
“ this excess, but to a much greater proportion. Sup4< pose, for instance, all the paper of a particular bank,
“ which the circulation of the country can easily ab“ sorb, amounts to forty thousand pounds, and the
*( bank keeps usually ten thousand pounds in gold and
<£ silver for its occasional demands. If this bank
" should attempt to circulate forty-four thousand
#c pounds, the excess of four thousand pounds will re“ turn as fast as it is issued. Fourteen thousand
“ pounds must then be kept instead of ten thousand
“ pounds, and the bank will gain nothing by the ex“ cessive circulation. On the contrary, it will lose the
“ whole expense of continually collecting four thousand pounds in gold and silver, which will be con4( tinually going out of its coffers as fast as they are
** brought in.”
He then adds— “ Had every particular bank always
<£ understood and attended to its own interest, the cir
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,f culation would never have been overstocked with
** paper money.”
There is, no doubt, some sort of ground for saying
that an excess of paper will come back upon the banks
which issue it, and that, in coming back, it will in­
volve the issuing banks in expense. Much excep­
tion, however, might be taken against Dr. Smith’s
mode of estimating the expense which the quantity
which would come back would bring upon the issu­
ing banks. But the objection which I shall, in the
first place, urge against the remark of Dr. Smith, is,
that, even granting it to be just, it can be just only in
a case which can scarcely ever occur among the coun­
try banks of this kingdom. I mean, that it can apply
solely to the case of a single bank of which the paper
circulates exclusively through a surrounding district:
it obviously cannot hold in the case of many banks,
the paper of all of which circulates in the same dis­
In order to explain this clearly, let us make the fol­
lowing supposition. Let us imagine the circulation
of country bank paper which a certain district will
bear to be one hundred thousand pounds, and ten banks
to be in that district, each usually circulating and able
to keep in circulation ten thousand pounds. Let us
also suppose an excessive issue of four thousand
pounds, and let us allow the effect of this on the ten
banks to be that which Dr. Smith describes, a point
which might certainly be disputed, namely, that a ne­
cessity will arise for a lw a y s keeping (for this is what
Dr. Smith’s language implies) an additional stock of
gold amounting to exactly four thousand pounds, and
also that a reiterated expense will be incurred (Dr.
Smith does not say how frequently reiterated) in col­
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lecting and transporting these four thousand pounds of
gold. Still it must be observed, that we may suppose
the issue of the four thousand pounds excessive paper
to be made by some one only of the ten banks, while
the charge incurred by such issue may be divided
among them all. It may, therefore, on Dr. Smith’s
own principles, answer to one of several banks emit­
ting paper which circulates in the same place, to issue
the paper which is considered by him as excessive;
and the practice of doing so may be owing to the
countrv bankers too well knowing his own interest,
and not, as Dr. Smith supposes, to his too ill under­
standing it.
But the case which I have supposed has been put
merely by way of illustration. When many banks
issue notes circulating over the same district, it is im­
possible to say whose paper constitutes the excess.
Whatever temptation to excess exists, must be a geral one. It is, however, counteracted not only by the
charge of transporting gold, on which alone Dr. Smith
dwells, but likewise by all the other charges, as well
as by all the risks to which country bank notes sub­
ject the issuers ; not to mention the difficulty of finding
a channel through which a quantity of paper much
larger than common can be sent by the country bank
into circulation.
Dr. Smith supposes, in the passage which has just
been quoted, that, when there is an excessive circu­
lation of country bank paper, the excess returns upon
the banks to be exchanged for gold and silver. The fact
is, that it returns to be exchanged not for gold and sil­
ver only, but either for gold and silver, or for bills on
London. A bill on London is an order to receive in
London, after a certain interval, either gold or Bank of
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England notes. This order imposes on the country
banker the task of providing a fund in London suffici­
ent to answer his draft: it serves, however, to spare
that expense of transporting gold, as well as to lessen
that necessity of maintaining a stock of guineas,
which Dr. Smith assumes to be the consequence of
every excessive emission of notes, and to be the cer­
tain means, if bankers do but understand their interest,
of limiting their issue.
The remark which has just been made derives par­
ticular importance from the circumstances of the pe­
riod through which we have passed. For, if the usual
means of preventing an excess of country bank notes
were nothing else than the liability of the issuers to
be called upon for a money payment of them, it might
fairly be assumed, that, at a time when the money
payment of them has been suspended, we must ne­
cessarily have been exposed to the greatest inundation
of country paper, and to a proportionate depreciation
of it. The unbourxted issue of country bank notes
has been restrained by the obligation under which
country bankers have considered themselves to be of
granting bills on London; that is to say, orders to re­
ceive in London Bank of England paper in exchange
for their notes, if required to do so: and it is certain
that they would be required to do so whenever the
quantity of their notes should be much greater in
proportion to the occasion for them, than the quantity
of the notes of the Bank of England in proportion to
the occasion for those notes.
For the sake of explaining this, let it be admitted,
for a moment, that a country bank has issued a very
extraordinary quantity of notes. We must assume
these to be employed by the holders of them in ma
Federal Reserve Bank of St. Louis


king purchases in the place in which alone the coun­
try bank paper passes, namely, in the surrounding
district. The effect of such purchases, according to
the principles established in this Chapter, must be a
great local rise in the price of articles. But to sup­
pose a great and merely local rise, is to suppose that
which can never happen or which, at least, cannot
long continue to exist; tor every purchaser will dis­
cover that he can buy commodities elsewhere at a
cheaper rate; and he will not fail to procure them in
the quarter in which they are cheap, and to transport
them to the spot in which they are dear, for the sake
of the profit on the transaction. In order that he
may be enabled to do this, he will demand to have
the notes which pass current in the place in which we
have supposed goods to have been rendered dear by
the extraordinary emission of paper, converted into
the circulating medium of the place in which goods
are cheap: he will, therefore, require to have his
country bank note turned into a Bank of England
note, or into a bill on London, which is nearly the
same thing, provided Bank of England notes are few­
er in proportion to the occasion for them than the
country bank notes; that is to say, provided Bank of
England notes have less lifted up the price of goods
in London than country bank notes have lifted up the
price of goods in the country.
This point may be still more fully illustrated in the
following manner. Let us imagine a mercantile house
to consist of two branches, the one placed in the me­
tropolis, the other in the country, and each branch to
be accustomed to make certain payments in the spot
in which it is situated, each, however, to be in the ha­
bit of borrowing as largely as it is able, the one of a
Federal Reserve Bank of St. Louis


neighbouring country bank, the other of the Bank of
England, and of applying these loans to the joint use
of the trading concern. Let us next suppose an ex­
traordinary facility of borrowing at the country bank
to arise, while the opportunities of obtaining loans at
the Bank of England remain the same.* Ei such case
the mercantile house, provided its London payments
continue to bear the same proportion as before to its
country payments, which will hardly fail to be the
case, will exchange some part of its increased loans in
the country, consisting in country bank notes, for bills
on London, or, in other words, for Bank of England
notes. It will thus adjust, with the greatest nicety,
the quantity of London and of country paper to the
amount of the pecuniary demands upon it in each
quarter; and, in doing so, it will contribute to prevent
the supply of notes in either place from becoming
greater in proportion to the demand than in the other.
What has been supposed of one house, may be sup­
posed of many similar ones; and not only of houses of
the particular description which has been spoken of,
but also of the several independent establishments in
the two distant places which have pecuniary transac­
tions together, and have an interest in accommodating

* T h e case here put is assumed
The point intended to be shewn, is,
least, that such cannot be the case,
hanks in the kingdom. A single

to exist only by way of argument.
that the case cannot happen : or, at
at the same time, o f all the country
individual, it is true, may find his

means o f borrowing at a particular country bank to increase in the man­
ner which is here supposed ; for he may obtain a preference over other
borrowers. A single bank, also, may find its means o f lending to increase ;
l°r its notes may usurp the place o f those o f other banks. There can,
howe' er, be no material enlargement on the whole o f the paper o f the
°ountry, while the facility o f borrowing in London remains the same.
Federal Reserve Bank of St. Louis


each other. Their general operations of a pecuniary
kind, must be such as always to check a local rise in
the price of commodities in either place, while it is as
yet so small as to be scarcely perceptible. In this
manner, therefore, the exchangeableness of country
paper for London paper will never fail very nearly to
equalize the value of them both. It is, moreover, im­
portant clearly to point out that their value will be
equalized, or nearly equalized, not by a tendency in
the London paper to partake in a low value which the
country paper has acquired in consequence of its not
being limited by any voluntary act of the issuers; nor
by a tendency in each to approximate in value to the
other; but by a tendency in the country paper to take
exactly the high value which the London paper bears
in consequence of its being restricted by the issuers.
That this must be the case is plain, from the remark
which has just been made; for it has been shewn, that
the country paper, however it may fail to be limited
in quantity by any moderation or prudence of the issu­
ers, becomes no less effectually limited through the
circumstance of their being compelled by the holders
to exchange as much of it as is excessive for the Lon­
don paper which is limited; which is limited, I mean,
in consequence of a principle of limitation which the
directors of the Bank of England have prescribed to
The country paper, let it then be observed, does
not add any thing to the quantity of the London pa­
per ; for the effectual limitation of the London paper
is the great point, which it must be borne in mind,
that we have assumed. The country paper, there-1
fore, does not in any degree diminish the price of the
London paper; for its price must remain fixed so long
Federal Reserve Bank of St. Louis


as its quantity continues fixed, supposing, as we do in
our present argument, that the demand for it is the
same. It has been proved, however, that the country
paper is rendered, by its exchangeableness with the
London paper, almost exactly equal to it in value. It
is, then, rendered almost exactly equal in value to a
paper of which the value is completely sustained.
Thus, therefore, the limitation of the supply of the
single article of London paper, of which, however, we
are taking for granted that the demand continues the
■same, is the means both of sustaining the value of
London paper, and also of sustaining the value as
well as limiting the quantity of the whole paper of the
It is, however, necessary here to point out to the
reader, that, in the immediately preceding observa­
tions, we have assumed certain facts to exist, for the
sake of stating clearly a general principle. It will be
the object of a succeeding chapter to shew in what
respects the case which has been supposed differs from
the actual one.

Federal Reserve Bank of St. Louis




Of the Circumstances which cause the Paper of the
Bank of England, as well as all the other Paper of
the Country, tofa il of having their Value regulated
according to any exact Proportion to the Quantity
of Bank of England Notes.
EVERAL points may be considered as having
been assumed, for the sake of describing dearly
the principle which was laid down in the close of the
former Chapter. They may be stated to have been
the following.
First, the notes of the Bank of England were spoken
of as forming exclusively the whole circulating medi­
um of the district which surrounds the metropolis,
and as having no circulation beyond the boundaries of
that district. The object was, then, to evince, that
supposing, secondly, the quantity of Bank of England

Federal Reserve Bank of St. Louis


paper to continue the same; and supposing, thirdly,
the payments within the district the same; and
supposing also, fourthly, the general circumstances to
be such as to render the same quantity of circulating
medium just as sufficient as before to effect the same
payments; the Bank of England paper could not fail
both to maintain its own value, and also to maintain
the value as well to restrict the quantity of the gene­
ral paper of the country.
In attempting to shew in what respects the case
thus put may have differed from the actual one, I shall
advert to each of the four points which have just
been mentioned.
First, the notes of the Bank of England have a cir­
culation, which is not perfectly exclusive, over any
definable district. In the metropolis itself, and in its
neighbourhood, they are the only current paper, some
coin circulating also. In many distant parts of the
country a very small quantity of Bank of England
notes circulate, and also much other paper, as well as
a certain quantity of coin. This London and countrycoin, as well as country paper, may happen through
various causes to supplant the Bank of England paper,
or to be supplanted by it, either in a greater or in a
less degree; and every such variation will have an ef­
fect which it is necessary to consider. If, for example,
a larger quantity than usual of Bank of England notes
should circulate in the country; then the quantity of
them which remains applicable to the uses of the Lon­
don district will be smaller, supposing the total amount
issued to be the same. In the case, therefore, of
more Bank of England notes circulating in the country, and in the case also of some Bank of England
notes occupying the place of guineas antecedently
Federal Reserve Bank of St. Louis

current in London, an issue of a larger total quantity
of Bank of England paper will be necessary in order
to give the same means as before of effecting London
payments, and in order to produce the same limitation
as before of the total quantity of circulating paper in
the country.
All the one and two pound notes of the Bank of
England (a species of paper which has been issued
only since the suspension ot its cash payments) have
clearly formed that sort of addition to the bank paper
of which I have been speaking. These have circu­
lated, some in London, and many of them in the coun­
try, in the place of guineas, which have disappeared;
and the amount of them has lately been two millions.
In order, therefore, to produce the same effect on the
country paper as before the suspension, the total
amount of Bank of England notes lately circulating
ought to have exceeded the quantity issued before
the suspension by about two millions, supposing all
other things the same. There are other causes which
occasionally produce variations in that part of the Bank
of England paper, which assists in supplying the dis­
tant country circulation: and these variations may
sometimes be considerable, and may not easily be esti­
mated. They probably, however, have not lately
been material. For though, while the practice of paying in gold has been suspended, country banks^ on the
one hand, may have been encouraged somewhat more
than before to push their notes into circulation, and
may thus have supplanted some of the paper of the
Bank of England usually passing in their neighbour­
hood; they certainly, on the other hand, have many
of them kept lately in their drawer a fund of Bank of
England notes, which was not heretofore deemed ne­
Federal Reserve Bank of St. Louis

cessary, for the sake of being able to offer these in
payment of their own paper.*
I have to consider, secondly, how far, allowing for
that difference of two millions of which mention has
been made, the circulating quantity of Bank of Eng­
land paper has lately corresponded with that of ante­
cedent periods.
The average amount of Bank of England notes in
circulation during three years ending in December
1795, appears to have been 11,975,573/. The amount
in circulation on the 26th of February, 1797, the day
antecedent to the suspension of the cash payments of
the bank, has been already stated to have been about
8,600,000/. this being that very low sum to which
they were then reduced.
By a statement of their
amount on the 6th December, 1800, laid before the
House of Commons, they appear to have been then
15,450,970/. This last mentioned sum includes the
two millions of one and two pound notes. If these
two millions are deducted, the amount on the 6th D e­
cember, 1800, will exceed the average amount in
three years antecedent to the suspension of the cash
payments of the bank by 1,475,397/. It remains,
however, to be observed, that the notes of the Bank
of England were stated to the House of Commons bv
the governor of that company, in the spring of 1801,
to have been then reduced to a sum less by about a
million and a half than their amount on the 6th De­
cember, 1800. The total quantity, therefore, of the
Bank of England notes in circulation in one part of
* Some Bank o f England notes have also been recently employed in the
?Uce o f small bills on London, the use o f which has lately been discou­
raged by the late additional duty on bill* and notes.
Federal Reserve Bank of St. Louis


the spring of 1801, if the two millions be deducted,
almost exactly agrees with their average amount
during the three years ending December 1795.*
We have to consider, thirdly, whether the payments
of the metropolis may be likely to have been the same
in the last year as in some preceding years.

* This account o f the comparative quantities of the Bank of England
notes circulating before, and o f those circulating after the suspension of
♦he cash payments o f the bank, differs greatly from that o f M r. Boyd,
who has, in his pamphlet, minutely investigated the same subject. T he
causes of this disagreement are the follow ing.
He mentions, as I have done, the amount of Bank of England notes to
have been, on the 6th December, 1800, 15,450,970/. He then compares
this their highest amount (for such, or nearly such, I consider it to be) first
with their lowest amount, namely, with their amount on the z6th February, 1797, which was 8,640,250/. and then with their average amount for
three years antecedent to the suspension of the cash payments o f the bank,
viz. 11,975,573/. the same average amount at which I have reckoned
them, for I have adapted M r. Boyd’s own statement. He then infers,
that, on the first of his principles o f comparison, an addition of nearly
four-fifths, and, on the second, of three-tenths, had been made to the sum
in circulation.
T o this representation the answer is, as will appear from the text, first
that of the 15,4 50,970/. stated to the House of Commons to be the amount
of Bank o f England notes in circulation on the 6th December, i8 c o , the
sum o f about two millions, consisting in one and two pound notes, ought
to have been deducted by M r. Boyd in forming his comparison. These
notes evidently fi¡led the place which was before occupied by guineas.
T hey were, for that reason, not added to the 13,450,970/. in the return
made by the bank to parliament, as they have been in the pamphlet of
M r. Boyd, but were set down as a separate article. Bankers have com­
monly given out these one and two pound notes as a substitute for gu i­
neas; and every individual, whether in London or in the country, who
has had a note of this description in his pocket, has obviously kept it in
the place o f gold.
It is to be replied, secondly, that the sum o f 8,640,250/. with which
one of the comparisons of Mr. Boyd is made, is that remarkably low ;ym
Federal Reserve Bank of St. Louis


A subject, in the examination of which there may
seem to be some difficulty, shall here, in the first
place, be discussed. It has been already observed,
that the quantity of Bank of England notes is limited
by the bank directors who issue them; and that the
quantity of country bank paper, though restricted
in an equal degree, is limited not by the act of the is­
suers, but through the circumstance of its exchange?o which the Bank improperly, as I have ventured to suspect, and cer­
tainly to the no small distress of the metropolis, had suffered their notes
to fall on the day antecedent to the suspension o f their cash payments, a
sum o f the smallness o f which Mr. Boyd himself has complained.
Their notes on the 18th February, that is, exactly one week before,
w e r e ................................................................................................ ^ . 9 ,137-95°

T hey were two weeks before - - - - - 9,431,550
Three weeks before - - - - - 9,667,460
A month before - - - - - 10,024,740
And five weeks before - - - - 10,550,830
T heir notes, also, immediately after they were at that lowest sum o f
8,640,250/. with which M r. Boyd forms the first of his comparisons,
were increased considerably: they were, on the 4th March, that is, one
week after, 10,416,520/. and they gradually raised still higher.
There can, therefore, be no doubt that the comparison ought to have
been made with the number which were in circulation, not at the remark­
able aera of the 26th February 1797, but only during an average o f year*
preceding the suspension.
T he fact of the Bank o f England notes having been reduced near a
million and a half in the spring o f 1801, a circumstance which renders
the amount o f them almost exactly equal at the two periods at which both
I and Mr. Boyd have made our comparison, could not be known to M r.
Boyd at the time of writing his pamphlet.
M r. Boyd founds, on the supposed fact o f the vast increase of Bank o f
England notes, the opinion which he states in the beginning o f his W ork,
that “ to the augmentation of bank paper not convertible into specie,
more than to any other cause, is to be ascribed the high price o f provi­
Federal Reserve Bank of St. Louis


ableness for London paper. By saying that the coun­
try paper is limited in an equal degree, 1 always mean
not that one uniform proportion is maintained between
the quantity of the London paper and that of the
country paper, but only that the quantity of the one,
in comparison with the demand for that one, is the
same, or nearly the same, as the quantity of the other
in proportion to the call for the other.
The reader, in reasoning on this state of the case,
may, perhaps, be inclined to infer, and it is a ques­
tion which seems to deserve consideration, that when
the Bank of England paper is more than usually re­
stricted, the pressure in London which in such case
takes place (for it is there that the general pressure
originates), may be likely to relieve itself either by
drawing to London a large part of the Bank of Eng­
land paper usually circulating in the country, the place
•which it occupied being supplied by country paper,
or by causing many of the payments of London to
transfer themselves to the country. If either of these
two consequences should result from every pressure
in London, then, even though the total amount of
Bank of England paper should be diminished, that
part of it which circulates in London may possibly
continue to be just as sufficient as before to perform
the task assigned to it of effecting the London pay­
ments; and in that case the country paper also, since
it always takes the price of the London paper, will
so far increase itself as to become in the same manner
as before commensurate with the country payments.
If any considerable effect of this kind should follow
from every limitation of the London paper; then the
principle wffiich was laid down in the close of the for­
mer Chapter in a great measure fails: and the bank
Federal Reserve Bank of St. Louis


has not that power which was ascribed to it of re»
stricting the quantity and regulating the value of the
paper of the country.
That a pressure in London is not likely to produce
the first of the two effects which have been mention­
ed, that of drawing to London the Bank of England
notes circulating in the country, is a point on which I
shall not separately dwell, except so far as to observe,
that a pressure in London, if it be very sudden and
severe, may be suspected of having a tendency di­
rectly contrary to that of bringing Bank of England
notes from the country to London; for it is apt,
through the alarm which it excites, to produce, as
was formerly explained, an extraordinary diminution
of country bank notes; a diminution, I mean, which
is even greater in proportion to the country payments
to be effected than that of the notes of the Bank of
England in proportion to the London payments. In
such case, a necessity is created for the substitution
of other circulating medium in the place of the coun­
try paper which has been suppressed. The substitute
principally demanded will be gold; but some Bank of
England paper is not unlikely to be also employed in
filling the void.
In proceeding to inquire whether a pressure in
London, arising from the restriction of Bank of Eng­
land paper, is likely to cause the transfer to the coun­
try of many of the payments usually made in London,
I shall advert to past experience.
It was mentioned in an early Chapter of this Work,
that there seems to have existed, for some time, an
increasing disposition to transfer to London the pecu­
niary part of even those commercial transactions which
belong properly to the country. It here naturally oc 25
Federal Reserve Bank of St. Louis


curs to us to inquire for what reason the restriction of
the notes of the Bank of England by the issuers in
time past, has not served to remove this disposition,
and even to cause the quantity of London payments,
compared with those of the country, continually to
lessen, rather than to increase. The Bank of Eng­
land paper, let it here be observed, operated before
the suspension of the cash payments of the bank in
restricting the country paper, exactly in the same
manner as it has done since that event. It is com­
monly and very naturally supposed, that it was the
exchangeableness of the country paper for guineas
which used to sustain its value. This, however, was
not the case: its value was sustained by its exchange­
ableness for Bank of England notes. The country
paper bore always and necessarily the same value as the
notes of the Bank of England; and not always or neces­
sarily the same value as the gold contained in the coin,
for which the country paper was exchangeable. It is
true, indeed, that the quantity of gold in our coin had
an influence on the value of country paper. It had,
however, only an influence which was imperfect and
indirect. It served to dictate to the directors of the
Bank of England what was that quantity of paper
which they might properly emit. For, if at any time
the exchanges of the country became so unfavourable
as to produce a material excess of the market price
above the mint price of gold; the directors of the
bank, as appears by the evidence of some of their bo­
dy given to parliament, were disposed to resort to a
reduction of their paper as a means of diminishing or
removing the excess, and of thus providing for the
security of their establishment. They, moreover,
have at all times been accustomed to observe some
Federal Reserve Bank of St. Louis


limit as to the quantity of their notes, for the same
prudential reasons.
This interest in the prevention of any great excess
of the market price above the mint price of gold was
in no degree felt by the country banker; for the loss
sustained by every new conversion of bullion into coin
was borne not by him, but by the Bank of England,
out of whose coffers all the guineas called for in every
part of the kingdom were supplied. The Bank of
England, if coin was demanded of it, had to purchase
bullion at a losing price. The country banker, if
coin was in like manner required of him, had only to
possess himself of a Bank of England note, which
was exchangeable at the bank for guineas without
any discount. If, therefore, the directors of the Bank
of England suffered their paper to be worth less
than the gold contained in the coin for which their
paper was exchangeable, the country paper was worth
less also; or, in other words, the degree of expense
and difficulty which the country banker incurred in
obtaining guineas, was to be measured by the degree
of expense and difficulty incurred in obtaining Bank
of England notes, and not by the degree of expense
and difficulty incurred in buying and then coining
gold. The necessity which the Bank of England
felt of curing any great excess of the market price
above the mint price of gold, caused the limitation of
Bank of England paper ; and then this limitation, in
proportion as it took place, produced the limitation
of the paper of the country. It was in this manner
-hat an excessive issue of the paper of the kingdom
Was restrained before the suspension of the cash pay­
ments of the Bank of England. If, then, the direc­
Federal Reserve Bank of St. Louis



tors of the bank were used before the suspension of
their cash payments to limit their issues through a
necessity which sometimes urged them, and if thus
they limited the paper of the country in the manner
which has been described, it follows that, supposing
them after that event to have restrained their issues
in like manner, though through a somewhat less ur­
gent motive, the general effect must have been the
same. There can, therefore, be no more reason to
suppose a transfer to have lately taken place of Lon­
don payments to the country, or of Bank of England
notes circulating in the country to London, than there
is to suppose the same transfer to have taken place in
the time when the bank paid in gold. Both the na­
ture of the pressure, and the principle on which our
paper credit stood, were the same at both periods.
It remains for us to inquire, how far the payments
of London are likely to have varied through any other
cause. It is probable that, under ordinary circum­
stances, they do not fluctuate in any very considera­
ble degree within a short distance of time. War
seems likely, on the whole, to increase them, both
by the additional business in the stocks, and also by
the other pecuniary transactions on the account of
government (transactions generally carried on entirely
in London), to which it gives occasion. It also in­
creases the payments of London, in common with
those of the country, by contributing to a general
rise in the price of articles. It is, however, necessa­
ry to guard this observation. In respect to the total
q u a n t it y of consumable articles produced and sold in
the kingdom, war, perhaps, may be considered a5
usually making little difference for, while it gives a
Federal Reserve Bank of St. Louis


spur to some, it operates as a check to other branch­
es of industry; and, while it increases national con­
sumption, it may possibly diminish, in an almost equal
degree, that of individual. It raises, however, the
p r ic e of commodities, and thus enlarges the general
amount of payments, though it more particularly aug­
ments those payments which are made in the metro­
polis. This general augmentation, however, of the
price of our articles, unattended by a similar rise in
the price of the commodities of other countries, ob­
structs, as has been already shewn, the exportation of
our goods; since it renders them less able to stand
the competition to which they are subject in foreign
markets, unless a compensation for the rise is afforded
to the foreigner in the computation of the exchange
between the two countries. The reader may, per­
haps, be led here to imagine, that the bank ought to
prevent this rise, according to the principles which it
is the object of this Chapter to establish, a sufficiently
considerable reduction of its paper being all that is
necessary for the purpose. No doubt the fact is, that
the tendency of goods to rise is continually restrained
by the limitation of the paper of the Bank of Eng­
land. And I apprehend that it is restrained just as
much as it is proper, or, perhaps, practicable, to re­
strain it, if the paper of the bank is so far confined as
to prevent an excess of the market price above the
mint price of gold: for, in that case, it is restrained so
far as still to afford to our goods the opportunity of
sale in a foreign market, without giving to the fo­
reigner that compensation in the exchange which
leads to the exportation of the current coin of the
country. To suppose the bank paper to be restrained
Federal Reserve Bank of St. Louis


much farther, is to suppose a profit on the importa­
tion of bullion; a profit, to which the continuance of
the importations of that article must soon put a pe­
riod. In saying, therefore, that war enhances the
price of goods, and thus causes an increase of pay­
ments, we ought here to bear in mind that it ought
only to be allowed to lift them up to that point to
which they can be raised consistently with the gene­
ral maintenance of our exchanges; and that, so tar as
they p e r m a n e n tly stand above that point, it is the en­
larged and too great quantity of notes of the Bank of
England which is to be considered as the cause of the
high price of goods, rather than the high price of
goods which is to be taken to be the cause of the en­
larged quantity of notes of the Bank of England.*
There is considerable danger, lest in this respect, we
should, in some degree, at least, mistake the effect

* It was observed in a former place, that this difficult and disputable
point would be again adverted to in the progress o f the present W ork.
T he fairest mode, as it appears to me, of determining which ought to be
deemed the cause and which the effect, is that which has been adopted in
the te x t; namely, to charge too much paper with being the cause when
the price of bullion is rendered permanently higher than that o f coin,
and, when, otherwise, to consider it rather as an effect. By the term
“ permanently,” I, however, mean such a degree of permanence as may
serve to shew that the fall of our exchanges, and the rise in the price o f
bullion, are not referable to any extraordinary and passing event, such as
that o f one or even o f two particularly bad harvests; for these may not
unfairly be termed temporary circumstances, though their influence may
extend over a period of or.e or two years. In general it may, perhaps,
also be assumed, that an excessive issue of paper has not been the lead­
ing cause o f a fall in the exchange, if it afterwards turns out that the
exchange is able to recover itself without any material reduction o f the
quantity o f paper.
Federal Reserve Bank of St. Louis


for the cause; and should too much incline to consider
an advanced price of commodities to be both the cause
of an increased issue of paper and the justification of
War, on the contrary, may be supposed to lessen
the amount of general payments, or, at least, to check
their growth, so far as it obstructs the accumulation
of wealth and the natural progress of commerce. We
know, however, that, during the late war, the amount
of our exported and imported articles continued great­
ly to increase. This happened partly, no doubt,
through the general tendency of our trade to enlarge
itself, partly through the advantages resulting from
some new colonial acquisitions, and partly from the
circumstance of the commerce of our competitors,
having been still more interrupted than our own. Our
exports and imports, it is true, form no just measure
of the total quantity either of our commercial transac­
tions or of our general payments; they afford, howe­
ver, some presumption of the enlargement of both.
If we take into consideration all the points which have
been touched upon, there will appear sufficient rea­
son to believe, that, during the late war, a very consi­
derable and progressive augmentation of the payments
of the metropolis must have taken place.
It now remains only to consider, fourthly, how far
circumstances may have been such as to have ren­
dered the same quantity of Bank of England notes
either more or less sufficient for effecting the same
quantity of London payments.
Several causes may have contributed to spare the
use of notes. First, it is to be remembered, that a
small extension of their quantity may be sufficient to
effect a comparatively large number of additional pay­
Federal Reserve Bank of St. Louis


ments; for the private bankers in London, who are
the chief holders of Bank of England paper, by no
means find it necessary to enlarge their stock of it in
full proportion to the increased number of their pecu­
niary transactions. The talent of economizing bank
notes is also a continually improving one ; and the very
circumstance of the suspension of the cash payments
of the bank, by serving to strengthen mercantile cre­
dit, has favoured the exercise of economy in the use
of the paper of the Bank of England. When pay­
ments were currently made in gold, the country banks
were subject to sudden demands for cash through tem­
porary alarms among the holders of their notes. From
these they have lately been more exempt, in conse­
quence of no other option having been given to those
who demanded payment of country bank paper than
that of receiving Bank of England notes in return. Since
the suspension of the cash payments of the bank, cre­
dit has been less subject to interruption, and the quan­
tity both of country paper and of Bank of England
notes has probably been less variable; or, if the fluc­
tuations of the latter have been as considerable as be­
fore, they may have more nearly corresponded with
the variations in the wants of the public.*
* Immediately after the payment o f the quarterly dividends on the pub­
lic funds, the amount o f Bank of England paper in circulation is consi­
derably increased; but the expectation that the plenty of it will soon
cease, dispofes bankers and others to hold for a time a superfluous quan­
tity. In consequence o f the additions to the public debt made during the
war, the occasional enlargements o f the quantity o f bank paper, arising
from thir. cause, have become much more considerable. A diminution o f
r.otes, if known to be temporary, and if also moderate, produces, on the
other hand, little pressure; for the expectation o f returning abundance
Federal Reserve Bank of St. Louis


To sum up the observations which have now been
made: it thus appears, that, since the suspension of
the cash payments of the bank, the number of its
notes has been the same, or nearly the same, as be­
fore that event, if those two millions of one and two
pound notes, which have been a mere substitute for
gold, are deducted; that the payments, however, of
the metropolis have been much increased; but that,
on the other hand, the same number of notes has pro­
bably sufficed of late for more than the same number
of payments.
It has not been the object of these remarks to found
upon them any exact estimate of the effect which the
quantity of Bank of England paper lately issued is
likely to have had on the cost of commodities, or on
the market price of bullion; but rather, on the con­
trary, to shew that no such estimate can with confi­
dence be formed, on account of the number of cir­
cumstances, some of them very difficult to be appreci-

lerves to maintain confidence, and to dispose the bankers to deem a some*
what reduced stock o f bank paper for the time sufficient. T he chief oc­
casion o f a diminution o f the number of bank notes has been, that o f the
payment o f the instalments on the public loans. The government, during
the latter years of the war, issued from week to week a species of exche­
quer bills, which they received back in part o f the payments on the loans.
By thus lessening the quantity o f paper taken out o f circulation at the
time of each instalment, they gave new facility to the operation o f raising
the public m oney; an operation which, however great, has in itself no
other difficulty than that which arises from the foo sudden diminution of
London paper to which it is apt to lead. It can scarcely be necessary to
add, that a great loan may, nevertheless, portend difficulty in other quar­
ters, and that the degree o f ease with which the payment of our loans may
be accomplished is, therefore, no true criterion o f the state of the public

Federal Reserve Bank of St. Louis


ated, which affect the question. I believe the fact to
be, that very little correspondence has subsisted be­
tween the fluctuation in the amount of Bank of Eng­
land notes in circulation at different times, and the va­
riations in the general price of articles at the same
periods; and this want of a very discernible connexion
between the cause and the effect, seems not unlikely
to have led some persons too hastily to conclude, that
the enlargement and diminution of Bank of England
paper have not that influence on the exchanges or on
the price of commodities which has been spoken
Let it, therefore, be carefully remembered, that I
by no means suppose a limitation of London paper to
operate simply by causing an equal reduction of coun­
try paper, and then such a fall in the price of goods
over the kingdom as is exactly commensurate with
the general diminution of paper; and, finally, also
such a variation in the exchange as is precisely pro­
portionate to the reduction of paper, and to the fall in
the price of goods. Counteracting circumstances of

# It is not long since the Bank o f England first adopted the custom o f
issuing notes for five pounds. These have circulated for some years in
the place partly of gold, partly o f country bank notes, and partly also,
though it is impossible to say in what degree, in the place o f ten pound
Bank o f England notes. There is, therefore, an unknown number o f
notes for five pounds which has formed that sort o f addition to the Bank
o f England paper, which has no influence in raising the price of articles.
T h is is only one o f many circumstances, some operating in one direction,
and some in the contrary, which render it difficult to draw a correct in­
ference from those accounts of the quantity o f Bank o f England notes cir­
culating at a variety o f periods, which have been lately laid before parlia­
Federal Reserve Bank of St. Louis


various kinds may prevent these proportions from be­
ing maintained: and the full effects may not follow
their cause until after the lapse of some period of
It must, in particular, be borne in mind, that a limi­
tation of Bank of England paper affects prices in a
great measure by its operation on the state of commer­
cial confidence ; and this influence on the minds of
men will be far from uniform. A small limitation of
Bank of England paper may give a great shock to con­
fidence, when the state of credit is delicate ; and may,
therefore, at such a time, much discourage specula­
tion. The very same limitation, under other circum­
stances of the country, may be almost without ef­
But although there is so great difficulty in estima­
ting the precise influence on the cost of articles, or on
the market price of bullion, which each alteration in
the quantity of Bank of England notes may produce,
there is no reason, on that account, to doubt the ge­
neral truth of the proposition which was laid down in
the close of the former chapter, namely, that the re­
striction of the paper of the Bank of England is the
mean both of maintaining its own value, and of main­
taining the value, as well as of limiting the quantity,
of all the paper in the country. Although it should
be difficult or even impossible, to determine to what
point the limitation must be carried in order to pro­
duce a given effect, it may be sufficiently clear that
the tendency of the limitation is to secure the benefit
in question.
The perplexities of this subject being such as I
have now described, it naturally occurs to us to reason
Federal Reserve Bank of St. Louis


from the effect to the cause, and to infer a too great
issue of paper when we perceive that there is an ex­
cess of the market price above the mint price of gold.
But this inference is one which, for reasons formerly
given, should always be very cautiously made; for it
is to be borne in mind, that the excess may arise from
other causes besides that of a too great emission of
paper. Let the manner in which an extravagant issue
of notes operates in producing the excess be recol­
lected. It raises, and probably by slow degrees, the
cost of British goods. It thus obstructs the export of
them, unless a compensation for the high price is
afforded to the foreign buyer in the rate of exchange;
and the variation in our exchange produces a low’ va­
luation of our coin, compared with that of bullion.
ri he state of the exchange, then, is the immediate
cause of the evil in question. Now, a suspension of
the foreign demand for British manufactures, or an in­
crease of the British demand for foreign articles, cir­
cumstances which may arise when there is no increase
of bank paper, are the much more frequent as well as
the more obvious causes of a fall in our exchange,
and, therefore, also of a high price of bullion.
We are thus led back to the point which was dwelt
upon some time since. Our two defective harvests,
and the interruptions experienced in our export trade,
very sufficiently account for the late fluctuation of our
exchanges. In these respects there has evidently been
much more in our situation which has been remarkable;
while, as has been proved in the present chapter,
there has been nothing which ought to be deemed ex­
traordinary in the quantity of paper issued by the B a n k
of England.
Federal Reserve Bank of St. Louis


It must, however, be admitted, that if an excessive
issue of Bank of England notes produces, as it has
been shewn to do, an unfavourable exchange; a re­
duction of them below the accustomed number must
have a tendency to improve our exchange, by what­
ever means it may have been made to turn against us.
But, after this admission, it may be remarked, that it
may be necessary to encounter much evil in effecting
the reduction. We have been lately placed between
two dangers j between that of a depreciated paper
currency on the one hand, and that of an inter­
ruption to our paper credit, and a consequent stag­
nation of our commerce and manufactures, on the
other. And, on the whole, we have, perhaps, owed
much to that liberal policy of the directors of the Bank
of England, which has led them to maintain a quan­
tity of notes in appearance increased, and in reality
not diminished, in spite of some political as well as
popular prejudices on this subject: at a time, also,
when their conduct was observed with particular jea­
lousy, on account of the suspension of their cash pay­
ments, and even when the course of exchange was
much against us. Whether the bank may have erred
a little on the one side or on the other, is a point which
it would be invidious very critically to examine, and
difficult to determine with certainty. It seems suffici­
ently clear, that if, at the period of the late northern
confederacy, when our exchanges were the least fa­
vourable, the bank had materially diminished its paper,
the embarrassment of our manufacturers and mer­
chants, which the state of the continent had begun to
render great, would have immediately become far
greater; and that manufacturing labour, which was
Federal Reserve Bank of St. Louis


then in some degree interrupted by a suspension o f
the demand for British goods on the continent, would
have been likewise obstructed at the same season (a
season of peculiar pressure on the common people,
from the circumstance of the scarcity) by a more than
ordinary difficulty which our manufacturers would have
experienced in effecting their payments. The stock
of goods in our warehouses, made ready for subse­
quent exportation, would, in this case, have been
smaller j and we might, therefore, on the whole, have
had to look forward to a less early rectification of our
exchanges. The difficulties of 1793 might have been
added to those of the spring of 1801 ; and if commer­
cial confidence had failed, political credit might in
consequence have been shaken at one of the most
critical periods of our history.

From the principles recently laid down, some addi­
tional inferences may be deduced.
It was the object of several former Chapters to
point out the evil of a too contracted issue of paper.
The general tendency of the present, as well as of
the preceding one, has been to shew the danger of a
too extended emission. Two kinds of error on the
subject of the affairs of the Bank of England have
been prevalent. Some political persons have assumed
it to be a principle, that in proportion as the gold of
the bank lessens, its paper, or, as is sometimes said,
its loans (for the amount of the one has been confound­
ed with that of the other), ought to be reduced. It
has been already shewn, that a maxim of this sort, if
strictly followed up, would lead to universal failure.
A sentiment has prevailed among other persons, which
has bordered on a very different extreme. They have
Federal Reserve Bank of St. Louis


complained of nothing, except the too scanty liberali­
ty of the bank, and have seen no danger in almost any
extension of its discounts, or profusion in the issue of
its paper, provided only the bills discounted (that is,
the bills received by the bank in return for its notes)
were real bills, and were those also of sufficiently
safe and responsible houses.
But it will appear from the principles laid down in
this and the preceding Chapter, that there may be a
disposition among very rich and punctual men to bor­
row a sum far exceeding that which it may be prudent
in the bank to lend. Every additional loan obtained
from the bank, if we suppose its gold to remain the
same, implies an increased issue of paper; but the
measure of such issue has been shewn to be regulated
by a principle which is not even connected with the
question of the opulence of the borrowers at the bank,
or of the nature of the bills discounted. The borrow­
ers make a promise (and we will suppose that there
is no reason to doubt the fulfilment of it) that the loan
shall be repaid with punctuality. But in what man­
ner is the payment to be effected? It will be made
either in notes furnished by the Bank of England it­
self, or else in gold supplied by the same company,
which notes and gold the bank must take care to ren­
der interchangeable for each other; and this is only to
be done by keeping down their quantity, and thus
maintaining their value.
Objections have been made by some to the mono­
poly of the bank. And its indisposition to lend to
safe houses, on the security of real bills, to an extent
which is deemed sufficient, has probably been the cir­
cumstance which has induced some mercantile persons
Federal Reserve Bank of St. Louis


to favour the idea of the establishment of a rival esta­
blishment. Competition, it is thought, would lead
to greater liberality; and, in a variety of respects,
>vould operate beneficially in this case, as it is known
to do in many others.
It has been evinced, however, in the present Chap­
ter, that we derive a material advantage from the
povver enjoyed by the Bank of England of exclusively
furnishing the paper circulation of the metropolis. To
this very circumstance the bank stands indebted for
its faculty of regulating all the paper of the kingdom.
On the bank is devolved the task of providing guineas
for the whole country : with the bank is lodged the
power of so restricting the general paper, as to render
bullion purchasable, except in some extraordinary ca­
ses of alarm or difficulty. If these excepted cases
should arise, and the cash payments of the bank should
be suspended, an event of the possible recurrence of
which we must not altogether exclude the idea; then
the same circumstance of the monopoly of the bank
affords to it the means of still sustaining the value
both of its own paper and of that of the whole island.
It serves also to impose upon the directors of this
powerful company a complete responsibility. If a
rival institution to the Bank of England were esta­
blished, both the power and the responsibility would
be divided; and, through the additional temptation to
exercise that liberality in lending, which it is the ob­
ject of competition to promote, the London notes,
and also the country bills and notes, would be more
liable to become excessive. Our paper credit would,
therefore, stand in every respect on a less safe foun­
Federal Reserve Bank of St. Louis


Objections to the Doctrine of the two preceding Chap­
ters answered. Of the Circumstances which render
it necessary that the Bank should impose its own
Limit on the Quantity of its Paper. Effect of the
Law against Usury. Proof of the Necessity of re­
stricting the Bank Loans, drawn from the Case of
the Transfer of Capital to Foreign Countries.
INCE it is not improbable that the reasoning of
the preceding Chapters may have failed to pro­
duce full conviction in the mind of those who have
been in the habit of deeming all limitation of the bank
paper by the bank itself to be unnecessary; some few
pages may be usefully employed in answering popular
objections to the doctrine which has been laid down,
^nd in more fully elucidating the subject.


Federal Reserve Bank of St. Louis


" The increase of Bank of England paper,” we will
suppose it to be still said by an objector, “ is the effect
<( and not the cause of an advanced price of commodi“ ties. To enlarge the bank of England notes merely in
“ proportion as safe and real bills are offered in return
“ tor them, is only to exchange one species of paper
" for another, namely, Bank of England notes for
<c bills, which, though not so current or so safe as
“ bank notes, are sufficiently worthy of credit. It is,
“ therefore, simply to afford a guarantee to the trans“ actions of the merchant, and thus to render that
“ accommodation to commerce which it belongs to
“ the bank to give.”
" The depreciation of paper,” it may be added, is
“ apt to arise not so much from an extension of its
“ quantity, as from a want of sufficient confidence in
“ it. The great object of the bank should, therefore,
fCbe to maintain the public confidence; to which it
“ contributes by furnishing, in return for bills confes“ sedly good, a species of paper still better. The
“ evil of an unfavourable exchange, and of a conse“ quent high price of gold, arises from an unfavour“ able balance of trade, and from that cause only.
<c The true mode of preventing this evil, or of reme“ dying it, if unfortunately it exists, is to increase the
“ national industry. The way to encourage industry
“ is to give full scope to trade and manufactures by a
“ liberal emission of paper. The balance of trade
“ will not fail to be rendered favourable by that abun“ dance of exportable articles which the labour thus
“ excited must necessarily create. The course of ex“ change will, consequently, be supported; all ex“ cess of the market price above the mint price ot
Federal Reserve Bank of St. Louis


“ gold will be prevented; and thus the value of our
“ paper will be sustained by the very means of its
“ increase.”
Suppose a reasoner, on the same side, to add, that
when the credit of the assignats of France was over­
thrown, the fall, especially at the first, was owing
rather to the prevalence of distrust than to the exces­
sive quantity of the article, and that the depreciation
of assignats rarely bore a regular proportion to the ex­
tension of their amount.*
It may, with equal truth, be affirmed by the ob­
jector, that if a reference be made to the prices of
corn in the London corn-market at various aeras, and
also to the account of the quantity of bank notes sta­
ted by the bank to have been in circulation at the
same or at immediately preceding periods, the price
of grain in London will by no means be found to have
been high in proportion as the number of Bank of
England notes has been great, and low in proportion
as it has been small; but that the very contrary has
often been remarkably the case. .
To these objections it may be answered, that they
* The follow ing extract from M r. Arthur Y oung’s Tour through
France, seems to establish the abovementioned tact.”
“ In September 1790, four hundred millions o f assignats were in circulation j but the discount at Bourdeaux never exceeded ten, at Paris
six per cent. A nd in M ay 1791, after many hundred millions more
were issued, the discount was from seven to ten per cent. Condorcet,
with other theories, expected that the prices o f corn, and o f other necessaries o f life, would enormously advance} but the contrary happened to be the event— the price of corn declined. The assignats a“ mounted, on the dissolution o f the first assembly, to eighteen hundred

“ m illions.” — Vol. I. 4-to edition, page 510.
Federal Reserve Bank of St. Louis


who represent an unlimited issue of Bank of England
paper as having no tendency to produce the evils of a
rise in the price of commodities in Great Britain, of
a fall in our exchange, and of an excess of the market
price above the mint price of gold, are bound to
prove one of the two following propositions: either,
first, that, supposing the directors of the bank to
make the most enormous addition to their paper; to
raise it, let us suppose, to fifty millions, even this aug­
mentation will not lead to the consequences which
have been mentioned; or if they do not affirm this
strong position, but admit that there is a certain quan­
tity of notes which will not fail to produce the evils in
question, then, secondly, in order to prove that the
bank need not place any limit to the issue of its own
paper, they are bound to shew that the bank paper
has a natural tendency sufficiently to limit itself.
Let us separately investigate each of these two
When we assume the fact of the bank paper being
raised from its present amount of about fifteen mil­
lions, to the sum of fifty millions, we are led, in
the first place, to inquire in whose hands the ad­
ditional sum of thirty-five millions would be placed,
and what would be the motive for holding it ? I
admit, or rather it is a point on which I would in­
sist, that the maintenance of the price of the as­
signats of France by no means rested entirely, nor,
for a time, even principally, on their quantity. It de­
pended much on the opinion entertained by French­
men respecting the value of the lands declared to be
purchaseable by means of this particular kind of paper,
and respecting the fidelity of the French government
Federal Reserve Bank of St. Louis


to its engagements. Assignats, it is true, bore no
interest; but the prospect of an ultimate profit to be
reaped by the possessor of them, would operate, for
a time, exactly like an accruing interest, in causing
many persons to detain them; and, therefore, although
they were used as a circulating medium, it is proba­
ble that only a part of them was turned to this pur­
pose, and that even that part circulated but slowly.
The reader is here desired to recollect a point which
was explained in an early part of this work; name­
ly, that the quantity of circulating medium which can
be employed without injury to its value, is to be es­
timated not merely by its proportion to the quantity
of trade or of payments, but also by the relative ra­
pidity of its circulation. A species of circulating me­
dium which changes hands once in ten days, will need
to be a hundred times as great in quantity as the pa­
per which passes through ten hands in one day.
When that sanguine spiiit which had at first inspired
the holders of assignats subsided, the article would
naturally sink in value with considerable rapidity ;
and in proportion as its price fell, the French govern­
ment would be under the necessity ot extending its
issues. It is, therefore, not at all surprising that
French assignats should, for a time, have borne a price
which was proportionate not so much to their quanti­
ty as to their credit. Their quantity, however, after
a certain period, operated on their credit, and became
a very powerful cause of their depreciation.
Bank of England notes ¿ire exactly the converse to
assignats in the points which have been mentioned;
and their value, on that account, will be found to de­
pend not so properly on their credit as on their quan­
I Reserve Bank of St. Louis


tity. It is true, that when, in consequence of alarm,
a run is made upon the bank for guineas, the same
confidence which is placed in gold is not reposed in
Bank of England paper. Even in this case, however,
it is only a small part of the community which is eager
for gold: the holders of a very large proportion of the
bank paper remain exactly as well contented as be­
fore to use it as the medium of their payments. And
since the hoarders of gold prefer it not to paper only,
but to land, to goods, and to almost every species of
property, the paper of the bank cannot be affirmed to
fall into discredit in consequence of applications for
coin made with a view to hoard it, so properly as gold
may be said to come into peculiar demand. In a sea­
son of alarm, our guineas are preferred by some per­
sons both to our bank notes and to goods, on the same
principle on which, in a state of extreme political con­
vulsion, diamonds, because they may be still more easi­
ly transported or concealed, would probably be pre­
ferred to gold.
By saying, therefore, that the value of bank notes
depends not on their credit, but on their quantity, I
mean to aifirm that their credit, so far as it affects their
value, is always good, and that the common fluctua­
tions of their price, in exchange both for goods and
bullion, are not, in the smallest degree, to be referred
to variations in the degree of confidence placed by
Englishmen in the good faith or the solidity of the
Bank of England. The magnitude of its capital is
perfectly well known, and not the slightest doubt sub­
sists respecting the sufficiency of its effects to answer
much more than all its engagements. If the rise and
fall in the public confidence in bank notes were the
Federal Reserve Bank of St. Louis

cause of the gradations in their price, the period at
which their value would have been the lowest would
have been that which followed the suspension of the
cash payments of the bank; an event certainly calcu­
lated, more than any other which has been experi­
enced, to affect the reputation of that company. But
it is a most remarkable fact, and a fact decisive on the
present point, that the exchanges of this country im»
proved, or, in other words, that Bank of England pa­
per rose in value when compared with bullion, in the
months subsequent to the suspension of its payments
in cash.
Bank of England paper, therefore, is not apt to vary
m its value in consequence of the fluctuations of the
public confidence in it; but essentially differs in this
respect from the late assignats of France. It presents
to the holder no hope of future profit from the deten­
tion of it. Not only does it bear no interest (in this
point, indeed, resembling assignats), but it offers no
substitute for interest, it holds out no privileges, cer­
tain or contingent, real or pretended, tempting the
possessor to detain it. There is, on the contrary, a
known and continually increasing loss sustained by
keeping it. On this account the quantity held by
each person is only that which the amount of pay­
ments to be effected by it renders, in his opinion ne­
We are at present assuming, for the sake of illus­
trating the subject, that thirty-five millions of addi­
tional bank paper are retained in the hands of the
public. Imagine a London banker to acquire his
share of them. The supply of bank notes which he
chooses to reserve in his drawer is always estimated
Federal Reserve Bank of St. Louis


by the scale of his payments; or, to speak more cor»
rectly, by the probable amount of the fluctuations in
his stock of notes, which fluctuations are proportion­
ate, or nearly proportionate, to the scale of his pay­
ments. So long, therefore, as his payments remain
the same (and they will not materially alter while the
price of goods suffers no variation, supposing his trans­
actions to retain their former proportion to those of
the whole kingdom), he will be perfectly indisposed
to hold fifty thousand pounds in bank notes, in the
place of each fifteen thousand pounds which he has
been accustomed to deem necessary. He will make
haste Jo part with the whole superfluous quantity;
he will offer to lend it to any safe merchants, and even
at a reduced rate of interest, in case he shall find that
borrowers cannot otherwise be invited.
If we imagine the merchants to become possessed
of the new paper, the same difficulty of accounting
for the detention of it remains; unless we admit that
the principles laid down in the two former Chapters
are just, and that the larger quantity of circulating
medium will cause goods to rise in value, and will
thus find for itself employment.
There seem to be only two modes in which we can
conceive the additional paper to be disposed of. It
may be imagined either, first, to be used in transfer­
ring an increased quantity of articles, which it must,
in that case, be assumed that the new paper itself has
tended to create; or, secondly, in transferring the
same articles at a higher price.
Let us examine the first of these cases.
An increased quantity of articles can only arise
from additional commodities either brought from
Federal Reserve Bank of St. Louis


abroad or produced at home through the exertion of
new industry. An extraordinary issue of paper will
bring goods from abroad only so far as it enables the
country to export either gold, or additional commo­
dities created at home, as the means of paying for the
foreign articles. The export of gold has its limit. It
is, moreover, desirable, for reasons which have been
fully stated, that this limit should be narrow. Whe­
ther a very great emission of notes tends to increase
the quantity of goods produced at home, is the point
which remains to be considered.
In examining this question, an error into which it
is very natural to fall must be developed. When the
Bank of England enlarges its paper, it augments, in
the same degree, as we must here suppose, its loans
to individuals. These favoured persons immediately
conceive, and not without reason, that they have ob­
tained an additional though borrowed capital, by which
they can push their own particular manufacture or
branch of commerce; and they are apt, also, though
not with equal justice, to infer, that the new capital
thus acquired by themselves is wholly an accession to
that of the kingdom; for it does not occur to them
that the commerce or manufactures of any other in­
dividuals can be at all reduced in consequence of this
increase of their own.
But, first, it is obvious, that the antecedently idle
persons to whom we may suppose the new capital to
give employ, are limited in number; and that, there­
fore, if the increased issue is indefinite, it will set to
work labourers, of whom a part will be drawn from
other, and, perhaps, no less useful occupations. It
may be inferred from this consideration, that there are
Federal Reserve Bank of St. Louis


some bounds to the benefit which is to be derived
from an augmentation of paper; and, also, that a libe­
ral, or, at most, a large increase of it, will have all
the advantageous effects of the most extravagant emis­
Let us also consider the mode in which the new
paper operates through the medium of these indivi­
dual borrowers, as unquestionably it does, in giving
life to fresh industry. The bank notes convey to them
the power of obtaining for their own use, or of de­
stining to such purposes as they please, a certain por­
tion of purchaseable commodities. The extraordinary
emission of paper causes no immediate difference in
the to ta l quantity of articles belonging to the king­
dom. This is self-evident. But it communicates to
the new borrowers at the bank a power of taking to
themselves a larger share of the existing goods than
they would otherwise have been able to command.
If the holders of the new paper thus acquire the
power over a larger portion of the existing stock of
the kingdom, the possessors of the old paper must
have the power over a smaller part. The same paper,
therefore, will purchase fewer goods, or, in other
words, commodities will rise in their nominal value.
The proprietors of the new paper will become greater
encouragers of industry than before; the owners of
the old paper, being able to command less property,
will have less power of employing labour. For in­
dustry is excited, strictly speaking, not by paper, but
by that stock which the paper affords the means of
purchasing. Money of every kind is an order for
goods. It is so considered by the labourer when he
receives if, and is almost instantly turned into monies
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worth. It is merely the instrument by which the
purchaseable stock of the country is distributed with
convenience and advantage among the several mem­
bers of the community.
It may be said, however, and not untruly, that an
increased issue of paper tends to produce a more brisk
demand for the existing goods, and a somewhat more
prompt consumption of them; that the more prompt
consumption supposes a diminution of the ordinary
stock, and the application of that part of it, which is
consumed, to the purpose of giving life to fresh indus­
try; that the fresh industry thus excited will be the
means of gradually creating additional stock, which
will serve to replace the stock by which the industry
had been supported; and that the new circulating
medium will, in this manner, create for itself much
new employment.
The supposition which has now been made is ad­
mitted to be just. Let the reader, however, take no­
tice, that it assumes the demand both for goods and
labour to become more eager than before. Now the
consequence of this increased eagerness in the de­
mand must, unquestionably, be an enhancement of
the price of labour and commodities, which is the
very point for which I am contending. Indeed, what­
ever view we take of the subject, we seem obliged to
admit, that, although additional industry will be one
effect of an extraordinary emission of paper, a rise in
the cost of articles will be another.
Probably no small part of that industry which is ex­
cited by new paper is produced through the very
means of the enhancement of the cost of commodities.
While paper is increasing, and articles continue rising,
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mercantile speculations appear more than ordinarily
profitable. The trader for example, who sells his
commodity in three months after he purchased it, ob­
tains an extra gain, which is equal to such advance in
the general price of things as the new paper has
caused during the three months in question :—he
confounds this gain with the other profits of his com­
merce ; and is induced, by the apparent success of
his undertakings, to pursue them with more than
usual spirit. The manufacturer feels the same kind
of encouragement to extend his operations; and the
enlarged issue of paper supplies both him and the
merchant with the means of carrying their plans into
effect. As soon, however, as the circulating medium
ceases to increase, the extra profit is at an end; and,
if we assume the augmented paper to be brought
back to its ordinary quantity, we must suppose indus­
try to languish for a time, through the ill success
which will appear to attend mercantile transac­
Mr. Hume has an observation in his Essay on Mo­
ney, which, in some degree, confirms the remarks
which have been made in the text. Having repre­
sented an influx of money as exciting industry (and
we may presume an increase of paper to have exactly
the same effect), “ At first,” he says, “ no alteration
“ is perceived; by degrees the price rises first of one
“ commodity, then of another, till the whole, at last,
“ reaches a just proportion with the new quantity of
“ specie which is in the kingdom. In my opinion,
“ it is only in ¿his interval or intermediate situation
“ between the acquisition o f money and rise o f prices"

(Mr. Hume must mean, no doubt, the completion of
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the rise, and not the commencement of it) ci th a t

“ in c re a s in g q u a n tity o f g o ld a n d silv e r is fa v o u r a b le
“ to in d u s tr y f *

It must be also admitted, that, provided we assume
an excessive issue of paper to lift up, as it may for a
time, the cost of goods though not the price of labour,
some augmentation of stock will be the consequence;
for the labourer, according to this supposition, may be
forced by his necessity to consume fewer articles,

* M r. Hume, in observing that, when money increases, “ the price
** rises first o f one commodity, then o f another, till the whole, at last,
“ reaches a just proportion with the new quantity of specie which is in
** the kingdom,” appears to me not sufficiently to advert to the tendency
o f money to go abroad as soon as it shall have raised the gold price o f
articles above their level in other countries, allowing for the charges of
transportation j a subject which will be more fully treated o f in the next
Chapter. He also describes the operation of an increase o f coin in rai•ing prices as proceeding somewhat more slowly than, perhaps, it would
be found to do. A n augmentation o f Bank o f England notes operates,
no doubt, in this respect, more quickly than an increase o f money; for
the London bankers, who are the great holders of bank paper, are likely
to be much less disposed to detain, for example, a double quantity o f it,
than all the individuals o f the kingdom are to detain in their several
drawers, or in their pockets, a double quantity of guineas. The banking
system , by committing the business of payments to few hands, has made
much difference in respect to the time within which an increased quantity
o f circulating medium may be supposed to raise the price of articles.


has given to many great holders of Bank o f England paper a very strong
interest on the side of not keeping a superfluous quantity of it.
That an increase o f the circulating medium tends to afford temporary
encouragement to industry, seems also to be proved by the effects o f the
Mississippi scheme in France; for it is affirmed by French writers, that
the notes o f Mr. Law’s bank appeared for a time to have a very p ow e rfu l
influence in extending the demand for labour, and in augmenting the
•visible and bona fide property of the kingdom.
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though he may exercise the same industry. But this
saving, as well as any additional one which may arise
from a similar defalcation of the revenue of the un­
productive members of the society, will be attended
with a proportionate hardship and injustice. This sup­
position also implies the acknowledgment of the point
for which we are contending, that an increased issue
of paper tends to raise the price of commodities.
It has thus been admitted that paper possesses the
faculty of enlarging the quantity of commodities by
giving life to some new industry. It has, however,
been affirmed, that the increase of industry will by no
means keep pace with the augmentation of paper.
The question now to be considered, is, whether, if we
suppose thirty-five millions of new paper to be sud­
denly issued, the fresh industry which would, conse­
quently, be excited, would create a quantity of goods,
the sale of which would give employment to all the
new paper. Let it be admitted, for the sake of illus­
trating this point, that the thirty-five millions of addi­
tional bank notes will have the extraordinary power
of calling at once into being thirty-five millions of new
goods; still it may be remarked, that even all this ad­
ditional property would by no means find employment
for that equal quantity of paper which is here assu­
med to have given existence to it.
We shall be able to explain this circumstance, as
well as to throw some new light on the general sub­
ject, by supposing an individual, A, to become, in
consequence of an extraordinary issue of paper, a new
borrower at the bank to the extent of twenty thou­
sand pounds. The twenty thousand pounds, while it
is held in the shape of paper, affording him no inter­
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est; he will make haste to part with it, by purchasing
goods, stocks, land, or some other article, to the ex­
tent of the sum in question. Suppose him to make
the purchase from B, in three days after he received
the notes. B is now in possession of twenty thou­
sand pounds in new bank paper, created by the ex­
traordinary emission; and is, in like manner, in haste
to part with it. Imagine him, also, to pay awav the
same paper in return for goods at the end of three
days. Thus the same notes will in six days have ef­
fected two purchases amounting together to forty
thousand pounds. If we imagine the like transaction
to be repeated again and again; the same notes will
in twelve days have effected the purchase of goods
amounting to eighty thousand pounds; in about a
month to two hundred thousand pounds; and in a year
to about two millions. Thirty-five millions of new
paper will thus effect in a year the sale of goods to
the extent of two or three thousand millions. In or­
der, therefore, to account for the employment of the
thirty-five millions, we must assume, if we allow no
rise in prices to take place, such a new quantity of
goods to be called into existence by the magic influ­
ence of the new paper, as to become a subject for
purchases, amounting, in a year, to no less than these
two or three thousand millions. We must assume
the creation not of thirty-five millions of property, but
of five, ten, or, perhaps, twenty times that sum; or
else we must suppose, what is not supposeable, that
the newly created capital of thirty-five millions chan­
ges hands as frequently as the thirty-five millions of
bank notes which created it; that is to say, that the
new property undergoes a fresh sale on every third
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Ihc case which has been put is inaccurate, inas­
much as the payments effected by bank notes are on
the account not merely of goods and other articles
sold, but likewise of numberless sums borrowed and
repaid. It is probable, however, that payments of
this latter kind will always bear a nearly uniform pro
portion to those of the other class. The general in­
ference which was intended to be drawn from the
case, will, therefore, be just.
In speaking formerly of the reduction of bank pa­
per, much pains were taken to point out the impor­
tant difference between that limitation of loans which
leads to a diminution of paper, and that which produ­
ces no such diminution; and it was then observed,
that it was by the quantity of Bank of England pa­
per, and not by the amount of loans, or by the amount
of loans so far only as they influence the quantity of
paper, that a judgment was to be formed of the pres­
sure on the metropolis, and of the reduction of pri­
ces. Many of the remarks then made respecting the
limitation of bank paper, apply with nearly equal
force to the subjeet of its increase.
It has now been fully shewn, first, that Bank of
England paper is an article of such a nature, that a very
superfluous quantity of it will never be for a long
time retained in any quarter; and, secondly, that the
vast increase of it, which, for the sake of more con­
venient discussion, was assumed to take place, can­
not possibly create such a new capital as shall furnish
the new paper with employment. There remains,
therefore, no other mode of accounting for the uses
to which the additional supply of it can be turned, than
-that of supposing it to be occupied in carrying on the
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sales of the same, or nearly the same, quantity of
articles as before, at an advanced price, the cost o
goods being made to bear the same, or nearly the
same, proportion to their former cost, which the total
quantity of paper at the one period bears to the total
quantity at the other.
We are thus brought, though by a different course,
to the point at which we arrived in an early part of a
fotmer Chapter. An enlarged issue of paper, it was
then observed, produces an increased facility of bor­
rowing, as well opinion of increased facility; and
thus adds to the eagerness of purchasers. It com­
municates an additional power of purchasing, not only
to the original borrower at the bank, but successively,
also, as has now been shewn, to all the other indivi­
duals into whose hands the new bank notes pass in
the course of their circulation.
Very strong confirmation of the present doctrine
may be furnished by a reference to the case of gold.
No one doubts, that, in the event of an augmented
supply of this article from the mines, the value of it
would fall nearly in proportion to the extension of its
quantity; especially if it were used for the sole pur­
pose of a circulating medium, and were also the only
kind of circulating medium.
The metropolis of
Great Britain is so circumstanced, that the issue of
an extraordinary quantity of bank paper for the pur­
pose of effecting the payments of London, in a consi­
derable degree resembles the creation of an extraor­
dinary supply of gold for the general uses of the
It was stated in the beginning of this Chapter, a?
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one objection to the doctrine which I have been en­
deavouring to establish, that “ to enlarge the quantity
“ of Bank of England notes merely in proportion as
“ sufficient and real bills are offered in return for them,
c< is only to exchange one species of paper for ano* ther, namely, Bank of England notes for bills, which,
a though not so current or so safe as bank notes, are
“ sufficiently worthy of credit. That it was, there“ fore, simply to afford a guarantee to the transactions
“ of the merchant, and thus to render that aecommo“ dation to commerce which it belongs to the bank to
“ give.” This objection will be sufficiently answered
by repeating an observation which has been already
frequently made, namely, that the effect produced by
paper credit on the price of articles depends not
merely on the quantity of paper in existence, but also
on its currency, or, in other words, on the rapidity of
its circulation. It was admitted in the objection, that
bills are not current like bank notes, and that it is the
greater currency of the latter which causes the ex­
change to be desired.
It was mentioned, as another argument against the
doctrine which has been laid down, that corn has not
Usually borne any sort of proportion to the quantity
of Bank of England paper in circulation at the same
time. The answer is, that the directors of the bank
have never augmented their notes in such a degree as
to be likely to produce any material alteration in the
general price of goods; that one or more of those cir­
cumstances which were dwelt upon in the preceding
Chapter, may have counteracted the tendency of the
fluctuations of the quantity of paper to produce cor­
respondent variations in the price of commodities;
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and, above all, that even a small reduction of the
supply of grain can hardly fail to lead to a rise in its
value when exchanged for paper, so great as to forbid
all comparison between the effects of an alteration of
the quantity of the one article and of an alteration of
the quantity of the other. Paper has been spoken of
as raising the cost of commodities, at the most, only
in proportion to its increased quantity. But in the
case of a diminished supply of corn, the' price rises
according to a very different ratio; and for this obvious
reason, that we cannot accustom ourselves to the use
of a reduced allowance of grain, in the same manner
in which we are able, by degrees, to accommodate
ourselves to a smaller quantity of circulating me­
* The following extract from the work o f Sir W . Davenant, who
wrote from 1695 to 1712, may give some idea of the vast effect which a
• mall failure o f the supply of coin has on the price o f thi* necessaiy o f
“ It is observed, that but one-tenth defect in the harvest may raise the
“ price three-tenths j and when we have but half our crop, which new
41 and then happens, the remainder is spun out by thrift and good rai“ nagement, and eked out by the use o f other grain ; but this will net
" do for above one year, and would be a small help in the succession of
“ two or three unseasonable harvests.
“ W e take it, that a defect in the harvest may raise the price of corn
“ in the follow ing proportions:
“ A defect of
“ 1 tenth
“ 2 tenths

above the common rate

- - lif

3 tenths,
8 tenths,

“ 3 tenths

1 six-tenths,

44 4 tenths

1 eight-tenths,

- J uL

“ 5 tenths
4 five tenths.
“ So that, when corn rises to treble the common rate, it may be pre** sumed that we want above one-third o f the common produce; and ff
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Let the principle which was laid down as regulating
the cost of all articles be recollected. The question
of prices is a question of power, arid of power only;
and, in the event of the scarcity of any commodity, the
buyers are more or less under the power of the sel­
lers, in proportion as the article in question is of more
or less urgent necessity.
That the quantity of circulating paper must be
limited, in order to the due maintainance of its value,
is a principle on which it is of especial consequence
to insist, as it has been overlooked by some writers on
paper credit. In the work of Sir James Stewart on
Political Economy, banks are discussed at considerable
len gth; but little intimation is given of the necessity
of confining the total quantity oi circulating paper, or
of the tendency of an excessive emission to render the
exchange unfavourable, and thus to cause gold to be
drawn away. On the other hand, the duty of not
giving out bank paper, except for sufficient value re­
ceived (a point on which, at the present time, there is
less occasion to enlarge) is strongly urged by this
writer, and the security of bills of exchange is implied

“ w e s h o u ld

w a n t fiv e -te n th s ,

or h a l f th e

com m on

p r o d u c e , t h e p r ic e

“ w o u l d r is e t o n e a r f i v e t i m e s t h e c o m m o n r a t e . ”

be very accurate. It i-, indeed, by n o means
on the supposition o f a deficiency of t h e antece­
d e n t c r o p o n l y ; o r of a deficiency o f the total stock, that is to say, of the
a n t e c e d e n t c r o p and o f the stock remaining over from a former year
t a k e n t o g e t h e r ; w h i c h a r e two v e r y different questions.
And many cir­
c u m s t a n c e s m a y r e n d e r such calculations, however just, by no means
e q u a l l y a p p l i c a b l e t o e v e r y period.
The passage, therefore, is quoted
T h i s s c a le


n o t li k e ly to

c l e a r , w h e t h e r it p r o c e e d s

m e r e ly fo r th e p u r p o s e o f
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giving some general ideas on the subject.

by him to be inadequate, that of land alone being ful­
ly approved. Bank notes emitted without obtaining
value in return, are termed by him paper issued for
“ value consumed
and are represented as the great
source both of loss and danger to a banking company.
His mode of expressing himself on this point is such
as to make him appear to lend much countenance to
the error which it is the object of the present Chap­
te r to expose; namely, that of imagining that a pro­
per limitation of bank notes may be sufficiently secured
by attending merely to the nature of the security for
which they are given.**
Dr. A. Smith, who is a more late writer, has as­
serted the necessity of a limitation of paper, in the
passage which was quoted in an early part of this

* “ W hen paper is issued for no value received, the security o f such
“ paper stands alone upon the original capital o f the bank ; whereas, when
“ it is issued for value received, that value is the security on which it
“ immediately stands, and the bank stock is, properly speaking, only
“ subsidiary.
“ I have dwelt the longer on this circumstance (namely, th3t o f taking
“ sufficient property in pledge for the notes issued), because many who
** are unacquainted with the nature of banks have a difficulty to compre“ hend how they should ever be at a loss for money, as they have a mint
'* o f their own, which requires nothing but paper and ink to create m il“ lions. But if they consider the principles of banking, they will find
“ that every note issued for value consumed, in place of value received
and preserved, is neither more nor less than a partial spending either o f
“ their capital or profits on the bank.”— Stewart’s Political Economy,
Book IV. Part II. Chap. IV.
Chapter V. is a short chapter, o f which the object is to shew that
“ banks” issuing circulating paper “ ought to issue their notes on private
“ not mercantile credit.” By private credit; that of “ lands and personal
“ estates” appears'to be meanri
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w ork; but he has done this in terms which are inac­
curate, and he has given an erroneous and inadequate
idea of the evil which may result from a very extended
M r. Locke has lent some countenance to the error
which I am endeavouring to expose, by his way of
considering the subject of the balance of trade, which
is the same mode in which I supposed, in the begin­
ning of this Chapter, an objector to conceive of it.
“ The evil of an unfavourable exchange,” I imagined
my opponent to say, “ and of a consequent high price
" of gold, arises from an unfavourable balance of trade,
“ and trom that only. The true way of preventing
<c this evil, or ot remedying it, if it unfortunately ex“ ists, is to inerease the national industry; and the
" way to encourage industry, is to give full scope to
cf trade and manufactures by a liberal emission of pa“ per. The balance of trade will not fail to be ren“ dered favourable by that abundance of exportable
“ articles which the labour thus excited must neces“ sarily be supposed to create.”
M r. Locke’s language respecting on unfavourable
balance of trade, and its influence in causing gold to
be melted down and exported, is as follows.
“ Profit,” he says, “ can be made by melting down
“ our money, but only in two cases. First, when the
tf current prices of the same denomination are unequal
“ and of different weights, some heavier some lighter;
“ for then the traders in money cull out the heavier,
“ and melt them down with profit. The other case
“ wherein our money comes to be melted down, is a
<f losing trade, or, which is the same thing in other
“ words, an over great consumption of foreign com*
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*f modities> Whenever the over-balance of foreign
“ trade makes it difficult for our merchants to get bills
“ of exchange, the exchange presently rises It the
<f law makes the exportation of our coin penal, it will
“ be melted down ; if it leaves the exportation of our
“ coin free, it will be carried out in specie—one way
“ or other, go it must. But this melting down carries *
“ not away one grain of our treasure out of England.
The coming and going o f that depends wholly upon
“ the balance o f trade
The error which I consider as encouraged and sup­
ported by this passage of M r. Locke (and much simi­
lar language is to be found in other writers), is this :—
the passage implies, that it is the comparative state of
our exports and imports which regulates the exchange,
and not at all the state of the exchange which regu­
lates the comparative state of our exports and imports.
It leads us to suppose, that an unfavourable balance of
trade (that is, the excess of the goods imported above
those exported) is exclusively the cause, and that the
bad state of the exchange is altogether the effect.
The passage inclines us not at all to suspect a circum­
stance which Mr. Hume admits in a note in bis Essay
on Money, namely,
that an unfavourable exchange
becomes a new encouragement to export.”
The point which I wish here to establish m$y be
still more clearly explained in the following manner.
It has been shewn in a former Chapter, and, indeed, it
is stated by Mr. Locke, that the selling price of bills
determines the rate of exchange. When, therefore,

* F u r t h c r C o n s i d e r a t i o n s c o n c e r n i n g r a i s i n g the Va-iue o f Money.
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for, example, persons abroad wishing to sell bills on
England are more numerous than those who are dis­
posed to buy them, the price of bills must drop; and
it must continue to fall until it becomes so low as to
tempt some individuals to become purchasers of them.
They who buy the bills on England, are the buyers of
so many orders to receive in England either money or
bank notes. The money or bank notes thus received,
unless left in some English hand (and they will be so
left in some few cases only), must be invested in Bri­
tish articles, and exported. The profit afforded by
the fall in the selling price of the bills must, there­
fore, be sufficient to cause the speculation of the
buyers of the bills to answer—the speculation I mean
of either bringing over British gold, which would not
otherwise have been transferred, or of purchasing and
exporting British commodities which would not other­
wise have been at that time transported. Thus,
therefore, an unfavourable exchange may be consi­
dered not only as becoming, according, to Mr. H um e’s
expression, “ a new encouragement to export,” but
as affording all that degree of encouragement to ex­
port which is necessary to secure as much actual ex­
portation either of gold or of goods, or of both, as shall
serve to equalize the exports and imports; unless,
indeed, the same cause, namely, the unfavourable­
ness of the exchange, should tempt foreigners to re­
mit money to England, and lodge it for a time in our
hands, with a view to the profit to be obtained by this
species of speculation.
The principle which I would lay down on the sub­
ject now under consideration, is, I think, simple and
•intelligible, and it applies itself to ail periods of time,
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and to every kind of circulating medium which may
happen to he in use. I would be understood to sav,
that in a country in which coin alone circulates, if,
through any accident the quantity should become
greater in proportion to the goods which it has to
transfer than it is in other countries, the coin becomes
cheap as compared with goods, or, in other words,
that goods become dear as compared with coin, and
that a profit on the exportation of coin arises. This
profit, indeed, soon eeases through the actual expor­
tation of the article which is excessive.
I would say again, that in a country in which coin
and paper circulate at the same time, if the two taken
together should, in like manner, become, in the same
sense of the term, excessive, a similar effect will fol­
low. There will, I mean, be a profit on sending
away the coin, and a consequent exportation of it.
I would say, thirdly, that in a country in which paper
alone circulates, if the quantity be in the same sense
excessive, supposing the credit of the banks which
issued it to be perfect, the paper will fall in value in
proportion to the excess, on an exactly similar princi­
ple; or, in other words, that goods will rise; and that
a necessity will exist for granting, in the shape of ex­
change, a bounty on the exportation of them equal to
that which would have been afforded in the two for­
mer suppositions, assuming the quantity oi circulating
medium to be excessive in an equal degree in all the
three cases.
It thus appears, that “ the coming and going of
gold” does not (as Mr. Locke expresses it, and as was
supposed in the objection at the beginning of this
Chapter) “ depend wholly on the balance of trade.’
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It depends on the quantity of circulating medium is­
sued ; or it depends, as I will allow, on the balance of
trade, if that balance is admitted to depend on the
quantity of circulating medium issued. M r. Locke,
howrever, is very far from leading his reader to con­
ceive that the balance of trade depends on the quan­
tity of circulating medium issued; for he describes an
unfavourable balance as resulting from a “ losing trade,”
and from an “ over great consumption of foreign com­
modities;” terms which seem to imply an unprosperous state of commerce, and a too expensive disposi­
tion in the people, and which naturally lead to the
conclusion, that the prosperity of the country will ef­
fectually secure us against the danger of the exporta
tion of our coin, whatever may be the quantity of our
It has now, I trust, been made sufficiently to ap­
pear, that banks, if they pay in gold, or if, while not
paying in gold, they maintain the value of their notes,
must observe some limit in respect to their emission
of them.
If, indeed, we could suppose a country to have no
intercourse with any other, we might imagine an un­
limited issue of paper to take place without producing
any difference in its value when exchanged for gold.
In that case it would be necessary' to assume the
price of goods to rise indefinitely, but the people to
be content to use a less and less proportion of gold to
paper, and oh that account to continue to consider the
relative value of gold and paper as the same. This
unlimited rise in the price of goods, and equally inde­
finite fall in the value of gold, are every where pre­
cluded by the commercial communications which take
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place between different parts of the world; gold in
exchange for goods, allowing for the expense of trans­
porting them, necessarily bearing that price, or near­
ly that price, in each country which it bears in all.
The variations in the value of bullion, as compared
with that of the circulating medium, serve, therefore,
to detect and restrain that too great emission of not-es
to which all countries would otherwise be prone; and
those operations of the exchange, which have been
described, are the means by which every bank is com­
pelled to make the value of its paper conform itself to
the ancient standard.
L et the case of the continental bank notes, already
spoken of, be here adverted to. The depreciation of
these has been apt to originate, as I conceive, in the
state of the exchanges. The unfavourable exchange
has produced a difference between the value of bul­
lion, and that both of the current paper of those banks
and of the current coin; and, when this difference has
become permanent and considerable, a discount on
the paper has established itself; in other words, coin
has ceased to bear the price of paper, and has taken
the price of bullion, and from that time the paper alone has passed at the reduced rate. The difference
between the value of the circulating medium of this
country and that of bullion has always been sufficient­
ly small to prevent the like discount from arising; and
so long as we avoid a discount, persons, in general,
do not discover that any depreciation of our paper ex­
ists. But even the most insignificant of those depres­
sions in the value of our circulating medium, which
are indicated by the exchange, are to be referred to
the same immediate cause from which the depreciation
Federal Reserve Bank of St. Louis


of the bank paper on the continent has originated. I
do not mean that our smaller and their greater depre­
ciations are alike to be referred to an excess of paper.
I would affirm, however, that they have equally re­
sulted from the circumstance of goods, at the time in
question, being too high in value (possibly, in the one
case, through an excess of paper, and, in the other,
through a fluctuation in the markets) to bear to be ex­
ported in sufficient quantity to satisfy the debt fo r
which payment has been demanded, unless an advan­
tage in the exchange was granted to the exporting
It may be convenient to the reader here to recapi­
tulate the several points which have been lately dwelt
I have shewn, first, that since Bank of England
paper affords ro profit to the holder, a very superflu­
ous quantity is not likely to be held in any quarter j
and that the additional thirty-five millions, which have
been spoken of, must, therefore, be supposed to be
employed either in transferring an increased quantity
of goods, which, in that case, it must be assumed to
have itself created, or in transferring the same goods
at a higher price. I have, then, insisted, that since
the fresh industry which is excited cannot be suppo­
sed to be commensurate with the new paper, it is ne­
cessary to assume (conformably to the principles of a
former Chapter), that a great rise in the price of com­
modities will take place. This rise in the cost of ar­
ticles in Great Britain must produce, as has been al­
so shewn, a diminution of the demand for them abroad, unless a compensation for their high price is
given to the foreigner in the rate of exchange j so
Federal Reserve Bank of St. Louis


that the too great emission of paper will be the cause
of a disadvantageous balance of trade, and also of an
unfavourable exchange; or, in other words, of a low
valuation of the circulating medium of Great Britain
when compared with that of other countries.
It has, likewise, been observed, that even the
smallest of those depressions in the value of our cir­
culating medium, which are indicated by the exchange,
arise out of the same circumstance which has produ­
ced the greater depreciations of the continental bank
paper; goods, it has been said, being rendered too
high (in the one instance, probably, by an excess of
paper, in the other by a fluctuation in the markets) to
bear to be exported in sufficient quantity to satisfy
the debts for which payment has been demanded, un­
less a bounty, in the shape of the exchange, be grant­
ed to the exporting merchant.*

* Some proof o f the tendency o f a too great emission o f paper to
render the exchange unfavourable by the means which have been descri­
bed, and to cause the current coin to be exported, is furnished by the fo l­
lowing extracts from arretes o f the French government, issued a short
time after the establishment o f M r. Law’s bank. The reader is desired
to take notice, that this bank was instituted on the same professed prin­
ciples with the Bank of England; was, for a time, independent of the
government, though sanctioned by it; possessed a capital o f one hun­
dred millions of livres, and lent money on good security. Being, how­
ever, permitted to issue notes to the vast amount of about thirty-eight
millions sterling, the credit (in some degree a well founded one) which
this bank obtained, encouraged the formation of the M ississippi scheme,
and led to other doubtful undertakings. The bank paper being rendered
exchangeable for the actions (or stock) of the M ississippi company,
though at a regulated discount, the value of it, like that of the late asS'gnats o f Franee, was made to depend on the public opinion of the pro^
Federal Reserve Bank of St. Louis


We cerne next to the second topic of inquiry,
namely, whether those bounds within which Bank of

fii 3 o f a speculation, and, therefore, on the credit o f the cijculating ar­
ticle, rather more, perhaps, than on its quantity.
Extract from the Kind’s ariett dated 21st M ay, 172O— The K ing
“ having caused to be examined in his council the condition to which the

kingdom was reduced before the establishment of the bank, that he
might compare it with its present condition j it has appeared to the
K ing, that the high rate of the interest o f money had done more damage to the kingdom than all the expenses which the late K ing had
been at during his several wars. By the establishment o f the bank, the
“ K ing lias restored things to good order. T he nobility have found, in
e< tke increase o f th e'value o f their lands, means to make themselves easy ;
“ manufacturer, commerce, and navigation, are re-established j the land 3
“ are cultivated, and the artificer w orks.”
B y the arret o f the ¿th March, his Majesty ordained “ that actions o f
the India (or Mississippi)- company might be concerted into bank
notes, and those notes into actions, accord ng to the proportion which
at that time was reckoned most just with respect to the value o f the
coin. It remained for his Majesty to find an exped ent fo r re-esta“ hlishing the ‘value o f the coin in such proportion as might suit foreign
“ commerce and the 'vent o f the products o f the country. His Majesty has
«« provided for these things by his declaration o f 11 March, which orders
“ the reduction o f tke valu e of coin."

T h is singular arret then proceeds to observe, that since “ this reduction"
o f the coin “ must necessarily produce a diminution o e price o f
“ commodities” (a measure calculated to produce its increase, and which
“ would only fail to have this effect so far as the too great issue o f paper
“ had already produced it), “ his M ajesty,” therefore, “ has judged the
“ general interest c f his subjects required that the price or nominal value
“ o f actions and oj bank notes should be lessened fo r maintaining them in
t: a ju st proportion w ith the coin and other commodities of tke kingdom, fo r
‘ •' hindering tke too high value o f coin from sinking tke public credit, and
‘■•far preventing the losses which his subjects might suffer in commerce
“ w ith foreigners."
T h e arret then directs that actions of 10,000 livres should be reduced
to 5,000, and bank notes of 1,000 to 500.
The people, after this arnst, w!i'cl\ doubled the public injury under the
Federal Reserve Bank of St. Louis


England paper must be confined, in order to guard against a dangerous depreciation of it, are likely to be
pretence o f dispensing equal justice, refused to t 3 ke the notes, and the
arret was revoked. Another arret, reducing the actions alone, was sub­
Still, however (as is observed by M r. Postlethwaite, from
whom this account is taken), “ the people having been flighted, would
“ not meddle with bank notes, except in payment for their goods, wh;ch
“ they raised four times above their usual value, or upon a very great
“ discount.”
Another ordinance of the K ing, to the following effect, was then is­
sued.—- “ His Majesty being informed that many o f his subjects, who,
“ ¡ft these latter times, have got considerable fortunes, forgetting wshat
“ they owe to their country, have sent the greatest part thereof into fo-

“ reign countries; and that some others o f his said subjects keep in the
“ said countries considerable susns in specie, with a design to place the
“ same there, which has kept up the course o f exchange to the advantage
“ of foreigners” (the exportation of the gold would tend so far as it went
to improve the course o f exchange, and was an effect o f the unfavourable
exchange and not the cause), “ and has occasioned the exporting out of
“ the kingdom a consitlerable quantity o f specie. And his M ajesty, con“ sidering how much it is important to remedy an abuse so contrary to
if the laws o f government, though without ionstraining the liberty of
“ commerce; his Majesty, with the advice of Monsieur the Duke o f
“ Orleans, regent, ordains, that in general ail Isis subjects shall be
“ obliged to recall their funds, and cause the same to be brought again
“ into the kingdom within two months from the publication o f this pre(i sent oidinance.”
It appears from the first of these arrets, that an increased emission o f
paper tends to raise prices as weil as to excite industry; from the second,
that it leads, however, to a very unfavourable exchange, and to the ex ­
portation of the coin of a country ; and tint the reduction of the value
c f the coin is the remedy which is naturally resorted to. T he same point
is confirmed by the third arret.
A ll the three arrets unite in proving the gross ignorance which at this
time prevailed on 'he subject o f exchanges ar.d o f paper credit, aiid in
shewing, therefore, the unfairness of inferring from the M ississippi p*<W
je£l in France the instability o f our own paper cieclit. In the instance of
our own South Sea scheme, no new bank was institute !, and :ke c:edit of
'he Bank of England paper was su rained.
Federal Reserve Bank of St. Louis


observed, in consequence of some natural tendency
which it has to limit itself, so that it is unnecessary
that the bank should restrain it.
In examining this question, I mean also to inquire
whether the adoption merely of such rules as may
tend, in a general way, to coniine the loans of the
bank, may be sufficient3 or whether, also, any limita­
tion of the specific sums lent may be necessary.
First, it is obvious that the principle of lending,
simply in proportion to the property of those who de­
sire to borrow, cannet be a safe one. If mere capi­
tal were to give a title to bank loans, the borrowers
might become beyond measure numerous; even all
proprietors of the public funds might prefer a claim
for assistance.
If it should be said that the bank loans ought to be
afforded only to traders, and on the security of real
bills, that is to say, of bills drawn on the occasion of
an actual sale of goods, let it be remembered that real
bills, as was observed in an early part of this work,
may be multiplied to an extremely great extent 3 and
moreover, that it is not only necessary sufficiently to
extend the customary length of credit, in order to ef­
fect the greatest imaginable multiplication of them. I f
the bank directors were to measure their discounts by
the amount of real bills offered, it may be appre­
hended, that bankers and other discounters, who now
take this better kind of paper, might become much
more considerable holders of mere notes of hand, or of
fictitious bills 3 and that an opportunity might thus be
afforded of pouring a vast additional quantity of real
bills into the Bank of England.
It may be imagined, that if the directors were to
Federal Reserve Bank of St. Louis


govern their conduct by a regard partly to the capital
of the borrowers, partly to the species of bills offered,
but partly, also, to the probability of punctual payment*
the addition of this third check to the former might
suffice. But it is here to be recollected, that the
bank itself, if we suppose a progressive enlargement
of notes, must be assumed to furnish perpetually in­
creasing means of effecting payments, and thus to ren­
der punctuality in fulfilling even the most extravagant
engagements convenient and easy to the merchants.
It only remains to inquire, lastly, whether any prin­
ciple of moderation and forbearance on the part of the
borrowers at the bank may be likely to exempt the
directors of that institution from the necessity of im­
posing their own limit.
It may possibly be thought, that a liberal extension
of loans would soon satisfy all demands, and that the
true point at which the increase of the paper of the
bank ought to stop, would be discovered by the
unwillingness of the merchants to continue borrow­
ingIn order to ascertain how far the desire of obtaining
loans at the bank may be expected at any time to be
carried, we must inquire into the subject of the quan­
tum of profit likely to be derived from borrowing there
under the existing -circumstances. This is to be
judged of by considering two points: the amount-,
first, of interest to be paid on the sum borrowed; and,
secondly, of the mercantile or other gain to be obtained
by the employment of the borrowed capital. The
gain which can be acquired by the means of com­
merce is commonly the highest which can be had1,
and it also regulates, in a great measure, the rate in
Federal Reserve Bank of St. Louis

all other cases. We may, therefore, consider this
question as turning principally on a comparison of the
rate of interest taken at the bank with the current
rate of mercantile profit.
The bank is prohibited, by the state of the law,
from demanding, even in time of war, an interest of
more than five per cent, which is the same rate at
which it discounts in a period of profound peace. It
might, undoubtedly, at all seasons, sufficiently limit
its paper by means of the price at which it lends, if
the legislature did not interpose an obstacle to the
constant adoption of this principle of restriction.
Any supposition that it would be safe to permit the
bank paper to limit itself, because this would be to
take the more n a tu r a l course, is, therefore, altoge­
ther erroneous. It implies that there is no occasion
to advert to the rate of interest in consideration of
which the bank paper is furnished, or to change that
rate according to the varying circumstances of the
At some seasons an interest, perhaps, of six per
cent, per annum, at others, of five, or even of four
per cent, may afford that degree of advantage to bor­
rowers which shall be about sufficient to limit, in the
due measure, the demand upon the bank for discounts.
Experience, in some measure, proves the justice of
, this observation j for in times of peace, the bank has
found it easy to confine its paper by demanding five
per cent, for interest; whereas, in war, and especially
in the progress and towards the conclusion of it, as
well as for some time afterwards, the directors have
been subject, as I apprehend, to very earnest solicita­
tions for discount, their notes, nevertheless, not being
Federal Reserve Bank of St. Louis


particularly diminished. It is, therefore, unreasonable
to presume that there will always be a disposition in
the borrowers at the bank to prescribe to themselves
exactly those bounds which a regard to the safety of
the bank would suggest. The interest of the two
parties is not the same in this respect. The borrow­
ers, in consequence of that artificial state of things
which is produced by the law against usury, obtain
their loans too cheap. That which they obtain too
cheap they demand in too great quantity. To trust
to their moderation and forbearance under such cir­
cumstances, is to commit the safety of the bank to
the discretion of those who, though both as merchants
and as British subjects they may approve in the ge­
neral of the proper limitation of bank paper, have,
nevertheless, in this respect, an individual interest
which is at variance with that of the Bank of Eng­
The temptation to borrow, in time of war, too
largely at the bank, arises, as has been observed, from
the high rate of mercantile profit. Capital is then
scarce, and the gain accruing from the employment of
it is proportionably considerable.
The reader, possibly, may think that an extension
of bank loans, by furnishing additional capital, may
reduce the profit on the use of it, and may thus les­
sen the temptation to borrow at five per cent. It has
been already remarked in this Chapter, that capital,
by which term bona f i d e property was intended, can­
not be suddenly and materially increased by any emis­
sion of paper. That the rate of mercantile profit de­
pends on the quantity of this bona f i d e capital, and
not on the amount of the nominal value which an in-
Federal Reserve Bank of St. Louis

creased emission of paper may give to it, is a circum
stance which it will now be easy to point out.
I admit, that a large extension of bank loans ma\
give a temporary check to the eagerness of the gene­
ral demand for them. It will cause paper to be for a
time over abundant, and the price paid for the use of
it, consequently, to fall.
It seems clear, howmver, on the principles already
stated, that when the augmented quantity of paper shall
have been for some time stationary, and shall have pro­
duced its full effect in raising the price of goods, the
temptation to borrow at five per cent, will be exact­
ly the same as before; for the existing paper will then
bare only the same proportion to the existing quan­
tity of goods, when sold at the existing prices, which
the former paper bore to the former quantity of goods,
when sold at the former prices: the power of purcha­
sing will, therefore, be the same; the terms of lend­
ing and borrowing must be presumed to be the same;
the amount of circulating medium alone will have al­
tered, and it will have simply caused the same goods
to pass for a larger quantity of paper. To assume un­
der such circumstances the same rate of mercantile
profit to subsist, is only to suppose that the trader
will be situated neither more nor less advantageously
than before; and that the annual gain which he will
obtain by trading with the same quantity of goods,
will bear the same proportion as before to their cur­
rent cost. If this observation be just, there can be
no reason to believe that even the most liberal ex­
tension of bank loans will have the smallest tendency
to produce a permanent diminution of the applications
to the bank for discount. It is the progressive aug­
Federal Reserve Bank of St. Louis

mentation of bank paper, and not the magnitude of
its existing amount, which gives the relief. It thus
appears, that the moderation and forbearance among
borrowers, which were supposed likely to restrain the
too great emission of paper, are only to be excited by
the means of its perpetual increase; by the means,
that is to say, of the very evil which it was assumed
that they would be sufficient to prevent.
The danger of enlarging the loans of the bank in
proportion to the extension of the demand for them,
may be more particularly shewn by adverting to the
case of the sudden transfer to foreign countries of ca­
pital which had been antecedently lodged in this. Let
us suppose the fQreign owners, either of British stocks,
or of property left in the hands of English correspon­
dents, to draw during the space of three months to a
very large amount; and let us imagine that, in conse­
quence of such an event, the exchange turns against
Great Britain to the extent of five per cent, and
moreover that, at the end of the three months, the
drafts ceasing, and the mercantile state of the coun­
try improving, the exchange returns to its proper le-1
vel. In this case any Englishman who can send goods
abroad on his own account, and draw for them during
the three months in question, will gain an extra pro­
fit of five per cent, supposing him to buy them in
England for the same English money, and to sell them
abroad for the same foreign money, for which goods
may be bought and sold at the periods preceding, and
following the interval of time of which we are speak­
ing. A similar extra profit will be obtainable during
the same three months- by a variety of other modes of
employing capital. It is obvious, for example, that
Federal Reserve Bank of St. Louis


the public funds may be expected to experience a
sudden fall through the great sale or foreign property
in the stocks, which we have imagined to take place.
He, therefore, who shall buy into the funds at the
season of depression, and shall sell out at the expira­
tion of the three months, will be likely to derive a
benefit from this species of speculation. It is also
plain that the quantity of goods in Great Britain will
be reduced through the enlarged exportations, as well
as through the suspension of imports, to which the
state of the exchange will have given occasion. The
profit, therefore, on the use of the remaining stock
will be generally augmented. The exportation of
bullion will afford a gain of the same sum of five per
cent, the expense of transporting it being, indeed,
deducted. The demand upon the bank for discounts
is, therefore, likely to be particularly earnest during
the period of which we are speaking; and it is im­
portant here to notice, that the ground on which it
will be made will not be that which was spoken of in
an early part of this work. It will not be the priva­
tion of that quantity of circulating medium which is
necessary for carrying on the accustomed payments,
for these will be very immaterially increased; the cause
of the extraordinary applications to the bank will be
the temporary advantage which may be gained, or the
loss which may be avoided, by borrowing, during the
three months in question, at the rate of five per cent.
A pressure, it is true, may be occasioned by the mul­
titude of foreign drafts, and it may resemble that which
would arise from a diminution of Bank of England
paper. Some of those merchants in whose hands the
foreign property had been placed may not be able,
Federal Reserve Bank of St. Louis


with sufficient readiness, to spare from their commerce
the sums necessary to answer the bills drawn upon
them. Creditors, not being permitted to demand
more than five per cent, interest from their debtors,
are apt, at particular junctures, to call in their money,
for the sake of taking to themselves the extraordinary
benefit to be obtained by the use of capital. The dis­
appointments thus brought on persons trading with
borrowed wealth are often productive of much evil.
The maintenance of the accustomed quantity of Bank
of England notes may, therefore, be insufficient to
furnish the means of securing the usual regularity of
the payments of the metropolis; and a material dimi­
nution of paper may be particularly inconvenient.
Possibly an augmentation of it may be necessary to the
due maintenance of credit, if we suppose, however,
a very great increase of bank notes to take place (and
an increase, probably, equal to the total capital trans­
ferred on account of foreigners, will immediately be
desired), the result must be a very important fall in
the exchange, in addition to the fall of five per cent,
already mentioned; and a new and proportionate dan­
ger to the Bank of England.
The point which it has been the object here to ex­
plain, might have been equally illustrated by ima­
gining either the case of a strong disposition in many
British subjects to transfer their own property to fo­
reign countries, in order to louge it there; or the case
of a general eagerness to extend foreign commerce;
for we must assume the transfer to foreign parts of an
additional British capital to take place on cither of
these suppositions.
The preceding observations explain the rea on of a
Federal Reserve Bank of St. Louis


determination, adopted some time since by the bank
directors, to limit the total weekly amount of loans
furnished by them to the merchants. The adoption
of a regulation for this purpose seems to have been
rendered necessary by that impossibility of otherwise
sufficiently limiting, at all times, the Bank of England
paper, which it has been the design of this Chapter
to point out.
The regulation in question I consider as intended
to confine within a specific, though in some degree
fluctuating, sum, the loans of the bank, for the sake
of restricting the paper. The variations in the amount
of loans fail of producing exactly correspondent varia­
tions in the amount of paper, in proportion as the
gold of the bank fluctuates. But the regulation being
a weekly one, opportunity is afforded of correcting
this attendant imperfection before any material evil
can have arisen. The changes which occur in the amount of the loans to government form another ground
for taking into weekly consideration the sum which
shall, in the succeeding week, be afforded to the mer­
To limit the total amount of paper issued, and to
resort for this purpose, whenever the temptation to
borrow is strong, to some effectual principle of re­
striction; in no case, however, materially to diminish
the sum in circulation, but to let it vibrate only with­
in certain limits; to afford a slow and cautious exten­
sion of it, as the general trade of the kingdom enlar­
ges itself; to allow of some special, though tempora­
ry, increase in the event of any extraordinary alarm
nr difficulty, as the best means of preventing a great
demand at heme for guineas; and to lean to the side
Federal Reserve Bank of St. Louis

oi diminution, in the case of gold going abroad, and
of the general exchanges continuing long unfavoura­
ble j this seems to be the true policy of the directors
of an institution circumstanced like that of the Bank
of England. To suffer either the solicitations of mer­
chants, or the wishes of government, to determine
the measure of the bank issues, is unquestionably to
adopt a very false principle of conduct.

Federal Reserve Bank of St. Louis


Of the Influence of Paper Credit on the Price of Commodifies. Observations on some Passages of Mon­
tesquieu and Hume. Conclusion.


HIS subject has been in so great a degree anti­
cipated by the discussions which have taken
place; that it will scarcely be necessary to do more
than to remind the reader of the principles which have
been laid down, and to point out the manner in which
they bear upon the present question.
It was observed in a former Chapter, that a very
considerable advance in the price of the commodities
bought and sold in one quarter of this kingdom, while
there was no such rise in any other, was not supposeable ; because the holders of the circulating medium
current in the spot in which goods wTere imagined to
have been rendered dear,-would exchange it for the
Federal Reserve Bank of St. Louis


circulating medium of the part in which they were
assumed to be cheap, and would then buy the com­
modities of the latter place, and transport them to
the former, for the sake of the profit on the trans­
The exchangeableness of our country paper for our
London paper was represented as always in this man­
ner preventing the quantity of paper circulating in
one place from being very disproportionate to the
quantity circulating in another j and as also precluding
any great local rise in the price of commodities within
our own island.
We may justly extend our views, and conceive of
Europe, and even of the world, as forming one great
kingdom, over the whole of which goods pass and re­
pass, as suits the interest of the merchant, nearly in
the same manner in which they spread themselves
through this single country.
In one particular, indeed, the resemblance between
the two cases fails. Country bank paper, as com­
pared with Bank of England notes, cannot be, to a
material degree, excessive in any part of England;
because, by the custom of our country banks, it is
convertible, without any discount, into the London
paper. But British paper is not exchangeable for the
circulating medium of the continent, unless a discount,
or difference, be allowed. Of this fluctuating dis­
count, or difference, the variations in the course or ex­
change are the measure.
It is true that the continental circulating medium,
like our own, varies in value. Both, however, com­
monly vibrate only within certain limits; and both may
be considered as fluctuating exactly so far as their
Federal Reserve Bank of St. Louis


value differs from that of bullion. To say that bul­
lion varies in its price, is to say that there is an altera­
tion in the general exchangeable value of that article,
which constitutes the standard of the world.
We are led, by these observations, to divide our
subject into two branches of inquiry: first, into the
question how far our paper credit may have raised the
price of goods in Great Britain, by causing their cur­
rent price here (that is to say, their price in British
paper, as well as in British coin) to be higher than
their bullion price; and, secondly, how far also the
bullion price of our commodities here (that is to say,
their value in exchange for the article of bullion) may
be suspected of having been enhanced by means of
the paper credit of Great Britain.
As to the first question; the highest influence
which a too extended paper credit can have had in
raising the current price of commodities in Great Bri­
tain above their bullion price, must be measured by
the difference which has subsisted between the mar­
ket price and mint price of gold; or, which is nearly
the same thing, by the fluctuation in the state of our
general exchanges. This difference or fluctuation has
at no period been more than about ten or twelve per
cent. Even this variation, however, has not been
fairly referable to a too great issue of paper, but ra­
ther to the peculiar circumstances of the country;
and, in particular, to our two bad harvests, which suf­
ficiently account for the unfavourable state of our ex­
The second question is, how far the bullion price
of our commodities may be suspected of having beer.
Federal Reserve Bank of St. Louis


raised through the influence of the paper credit of
Great Britain.
It was formerly stated, that the bullion price of ar­
ticles may be considered to be their general price:
because bullion necessarily bears that value, or nearly
that value, in each country, in exchange for goods,
which it bears in all, allowance being made for the
expense of their transmission, inclusive of export and
import duties, ordinary profit of the merchant, freight,
insurance, and other customary charges. The ex­
pense of the transportation of commodities from the
several places of their growth or manufacture, an ex­
pense which is great in some cases, and small in others,
is the measure of the difference subsisting between
the bullion prices of the same articles, at the same
time, in different parts of the world. Each addition
to this difference implies an extra profit on the trans­
portation either of bullion or of goods; and must be
supposed soon to cause the one or the other to be
carried over in such quantity as to restore their due
relative price. Every rise, therefore, of the bullion
price in Great Britain of those commodities which she
is accustomed to export, if we suppose the usual ex­
portation to continue, implies an equal, or nearlv
equal, enhancement of the bullion price of all articles
of the same class in every foreign part in which our
commodities are sold.
Great Britain so remarkably takes the lead in ma­
nufactures and commerce, that she may not unjustly
be deemed to have the power, especially in a time of
general war, of prescribing to foreign countries the
rate at which they shall buy her commodities.
That monopoly of the supply, however, which I
Federal Reserve Bank of St. Louis


am here supposing Great Britain to possess, is, proba*
bly, but temporary, and, in every respect, imperfect.
In most of her sales abroad she meets with strong
competition; for, though other countries may not ri­
val her in the quality of her goods, they can, gene­
rally, furnish a substitute, which, if British prices are
much lifted up, will gain, by comparative cheapness,
.the preference. Every great enhancement of the cost
of our articles must lessen the foreign demand for
them. It must reduce our exported and augment
our imported goods. By thus turning the balance of
trade against us, and rendering our exchanges unfa­
vourable, it must cause the rise at home to be a rise
not in the bullion price of our articles, the subject
which we are now considering, but in the paper or
current price, the point which was noticed before.
If the advance is in the paper or current price, the
bank is compelled to restrict its issues ; and the reduc­
tion of the quantity of bank notes has a tendency to
limit the cost not only of those particular commodities
which are the subjects of exportation, but of every
commodity in the kingdom.
That the bullion price of some British articles has
lately been much increased, and that the bullion price
of all, or of almost all, has in some degree risen, are
facts which cannot be doubted. But that this enhance­
ment is to be charged to an increase of paper, is not
equally to be admitted; for it is plain that other causes
have powerfully operated, namely, a state of war,
new taxes, and two bad harvests, which, by raising
the price of bread, have in some degree lifted up that
of labour, and of all commodities. Our prices may
have ako betn partly augmented by the enhancement
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of the cost of raw materials brought from other coun­
Although it should be granted, as it must, either
that the amount of our paper has been enlarged in
proportion to the extension of pecuniary transactions;
or that an increased economy in the use of it has ren­
dered an equal quantity sufficient for more payments
(and it seems of little moment which of these two
suppositions is adopted): still it may be questioned
whether the extended issue of paper ought to be
deemed the cause of the high prices; or whether the
high priees ought not to be deemed the cause, and
the increase of paper the effect.
It was before remarked, that it seems in general
more fair to consider the latter to be the case, when
the extension of paper is not such as to be the means
of reducing its value below that of bullion. To prove
the reasonableness of this observation, let us imagine
the paper credit of this country to be abolished, and
our payments to be conducted by a circulating medium
Consisting wholly of gold; and let us assume, that we
still find ourselves able to procure for our commodities
sent abroad a higher bullion price than before. In
this case the bullion price of articles at home will also
experience a rise; for the high bullion prices abroad
will have the effect of enlarging our exported and di­
minishing our imported goods; of rendering our ba­
lance of trade favourable, and of bringing gold into the
kingdom; which increase of gold will have precisely
the same effect as an augmentation of paper, namely,
that of raising British prices. The bullion will conti­
nue to flow in until it shall have brought the bullion
price of goods in England to a level with the bullion
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prices of the same articles in foreign parts, allowing
for charges of transportation. On the ability, there­
fore, of Great Britain to maintain a high bullion price
for her goods abroad, would depend the bullion price
of her commodities at home, in the event of her em­
ploying gold as her only circulating medium.
If we suppose paper to constitute the circulating
medium of Great Britain, and an increased bullion
price for her commodities abroad to be in like manner
obtainable, the case will in the main be similar, though
in one particular it will differ. The case will be si­
milar, inasmuch as Great Britain will experience, ex­
actly as if she made use only of gold, an increase in
the price of her commodities at home, as well as an
enlargement of the quantity of her circulating medium;
such an enlargement, I mean, as is necessary for ef­
fecting her more extended payments. The case will
differ, inasmuch as, instead of importing the additional
circulating medium which is wanted, she will create
it. The production, therefore, of a rather less quan­
tity of exportable articles will be necessary on the one
supposition than on the other; and the state of the
exchange itself will be in some degree affected by
this variation in the circumstances of the two cases.
It may, perhaps, be thought, that I have consider­
ed the bullion price of goods in Great Britain as ex­
clusively depending on the bullion price of the same
kind of commodities abroad; and that I ought to have
stated the converse to be also in some measure the
tact, namely, the bullion price of articles abroad to
depend in part on the bullion prices of Great Britain.
I have intended thus to represent the case. My po­
sition has been this,—that the bullion price of articles
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in Great Britain conforms itself to the bullion price
abroad; but that, in the formation of this bullion price
abroad, the British price has some share of influence:
and this influence I have considered to be proportion­
ed to the degree of our monopoly of the supply of the
foreign markets.
There is an additional mode of considering the in­
fluence of paper credit on the bullion price of arti­
The increased use of paper in each individual coun­
try must contribute to lower the price of bullion, by
lessening the general demand for it in the world. On
every advance in the cost of commodities, it may be
suspected that the means of effecting the increased
payments are supplied not by bringing more gold into
use, but rather by the enlargement of that part of the
circulating medium which consists in paper. No in­
considerable portion of British gold coin is employed
in effecting the fractional parts of payments; and the
total amount of these does not increase in the same
proportion in which the sum total of payments is aug­
mented.* Moreover, the art of economizing gold is

* T he bank notes in circulation commonly are notes for five, ter,
fifteen, twenty, twenty-five, thirty, forty, fifty, and one hundred pounds
and upwards. I f we suppose the price o f ail articles to be doubled, then
we may assume every payment o f one guinea to be a payment of two
guineas, and to employ a double quantity of gold ; every payment of two
guineas to be a payment o f four guineas» and also to employ a double
quantity o f gold; but every payment o f three guineas will be a payment
o f six, and it may employ a five pound note, the fractional part only
being paid in money. This particular payment w ill, therefore, require
less gold. A payment o f four guineas will be 3 payment o f eight, and
will also require less gold. The payments of more than four guineas*

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continually advancing. The very vicissitudes of com­
merce, probably, tend to improve it. A time of dis­
tress, such as was felt in 1793, compels many to re­
sort to new expedients, tending to spare the use both
of Bank of England notes and of coin. The measures
adopted, at first, through necessity, are afterwards
persisted in because they are economical. To put
the case which we have more recently experienced.
An unfavourable balance of trade, arising out of the
disadvantageous circumstances of the country, causes
our guineas to go abroad. Paper is necessary to sup­
ply their place. Experience of the loss incurred by
hoarding money, and of the practicability of sustaining
both private and public cYedit during the absence of
gold, strengthens the general confidence in a paper
currency, and encourages a permanently increased use
of it. I f we could suppose as large a substitution of
paper in the place of coin to take place in other coum
tries as we have lately experienced in our own; the
diminution of the demand for bullion might be such
as very materially to affect its general value, and to
enhance the money price of articles over the world.

There is, however, a limit to this evil. The annual
supply of the precious metals is obtained from mines,
of which some afford to the proprietors a higher and
when, in like manner, doubled, w ill some of them employ a greater and
some a less quantity o f gold than before. They will employ, taking
them together, the same quantity. It is evident from this statement,
that an increase of the quantity o f the circulating medium of a country
employing paper in its larger payments, and coin only in the smaller, will
consist chiefly of paper; a circumstance which may considerably tend to
prevent in increased demand for bullion on the occasion o f an augmenta­
tion of prices, and which may, therefore, greatly facilitate a rise of ’>
bullion price o f articles in the world.
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others a lower revenue, and some probably no reve­
nue at all. If we suppose the increased use of pa­
per to lower, in any degree, the value of the precious
metals; we must assume those mines which have not
yielded any rent, to be no longer worked; and the
supply of gold and silver to be, in consequence, some­
what reduced. If we imagine the reduction of the
price of the precious metals to be progressive, we
must conceive a period to arrive when all mines will
be unable to defray the charge of extracting the ore,
except those which now yield the very highest rent.
A t this point the fall will necessarily stop. In other
words, gold and silver must continue to bear that price,
or nearly that price, at which they are now exchange­
able for commodities, a deduction being made of the
total present rent derived from the richest m ines; a
deduction which, it Dr. A. Smith’s observations on
this subject are just, cannot be very considerable.
M r. de Montesquieu has represented, in the fol­
lowing manner, the principle which regulates the
price of the precious metals. He “ compares the
“ mass of gold and silver in the whole world with the
“ quantity of merchandise therein contained,” and
“ every commodity with a certain portion of the en“ tire mass of gold and silver:” and then observes,
that, “ Since the property of mankind is not all at
“ once in trade, and as the metals or money also are
“ not all in trade at the same time; the price is fixed
“ in the compound ratio of the total of things in trade
“ with the total of signs in trade also.” This theory,
though not altogether to be rejected, is laid down in
a manner which is very loose and fallacious.*
* It is controverted at great length in the work o f Sir Janies Stewart

on Political Economy.
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Not to mention the misconception of the subject
which may arise from the silence of Mr. de Montes­
quieu respecting the state of the mines, it may be
observed, first, that he alludes, in a manner so im­
perfect as to be scarcely intelligible, to those effects
of the different degrees of rapidity in the circulation
both of money and goods, which it has been one ob­
ject of this work to explain. It is on the degree of
the rapidity of the circulation of each, combined
with the consideration of quantity, and not on the
quantity alone, that the value of the circulating medi­
um of any country depends.
M r. de Montesquieu also leaves out of his conside­
ration the custom of transacting payments by means
of entries in books, and of other expedients. In pro­
portion as contrivances of this sort prevail; and they
must abound more and more as commercial knowledge
advances in the world; the demand for bullion will be
H e also does not advert to that reserve of gold and
silver in the coffers of the banks of various countries
which merely forms a provision against contingencies.
The amount of this reserve will depend on the opi­
nion which the banks entertain respecting the extent
of the sum likely to be suddenly drawn from them,
in consequence either of fluctuations in the national
balances of trade, or of temporary interruptions of
credit among individuals. In proportion, therefore,
as the variations in the national balances of trade, as
well as in the state of commercial confidence, are
greater or smaller, the fund of gold which is kept out
of circulation will be more or less considerable. On
the amount of this fund depends, in no inconsiderable
degree, the price of bullion in the world
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M r, de Montesquieu likewise omits to take into
his account that now immense and perpetually in­
creasing influence in sparing the precious metals
which arises from the use of paper credit. The false
impression which he gives of this subject, may chiefly
be referred to his not having contemplated the effects
of the introduction of the banking system.
M r. Hume has spoken strongly of the influence of
paper credit in sparing the use of the precious metals,
and in proportionably lowering their value, and raising
that of labour and of commodities. H e inveighs against bank paper on this account, as well as on some
others; but, in so doing, he appears to assume, that
paper credit causes a merely local rise in the price of
articles; a rise, I mean, which extends itself only
over the whole of the single independent country in
which the paper is issued. That bank is considered
by him as most advantageous to a state, which locks
up all the gold received in return for its notes [he ad­
mits that it will have no profit on its dealings], and
thus causes the total quantity of circulating medium
to remain the same. The price of labour, he says,
will, in this manner, be kept down. The Bank of
Amsterdam is approved by him, on account of its be­
ing an establisment of this nature.* In thus repre­
* It has been already observed, that, when the French possessed them­
selves of Holland, it was discovered that the Bank, o f Amsterdam had
been accustomed privately to lend its deposits of specie to the city of A m ­
sterdam, and, also, to the old Dutch government. T h e specie thus lent,
as soon as goods its exchange for it experienced a very small rise in H ol­
land, would naturally find its way to other countries. T he following
are the passages from M r. Hume, referred to in the text.
“ In general we may observe, that the dearness of every thing, from
“ plenty o f money, is a disadvantage which attends an established coni-
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senting the subjeet, he appears to forget, that, when
the total circulating medium of a country, whether

c* merce, and sets bounds to it in every country, by enabling the poorer
“ states to undersell the richer in all foreign markets.
“ T h i s h a s m a d e m e e n te r ta in a d o u b t c o n c e r n in g th e b e n e fit o f b a n k s
“ a n d p a p er c r e d it, w h ic h a re s o g e n e r a lly e ste e m e d a d v a n ta g e o u s to e v e r y

n a tio n .

“ That provisions and labour should become dear by the increase of
“ trade and money, is, in many respects, an inconvenience; but an in“ convenience that is unavoidable, and the effect o f that public wealth
“ and prosperity which are the end o f ail our wishes. It is compensated
“ by the advantages which we reap from the possession of these precious
" metals, and the weight which they give the nation in all foreign wars
** and negotiations. But there appears no reason for increasing that in“ convenience by a counterfeit money, which foreigners will not accept o f
“ in any payment, and which any great disorder in the state will reduce
“ to nothing. There are, it is true, many people in every rich state, who,
<« having large sums o f money, would prefer paper, with good security,
« as being o f more easy transport, and more safe custody. I f the public

provide not a bank, private bankers will take advantage o f this circumstance, as the goldsmiths formerly did in London, or as the bankers do, at present, in D u b lin : and, therefore, it is better that a public
company should enjoy the benefit o f that paper credit, which always

“ will have place in every opulent kingdom. But to endeavour artijici“ ally to increase such a credit, can never be the interest of any trading
** nation, but must lay them under disadvantages, by increasing money
“ beyond its natural proportion to labour and commodities, and thereby
“ heightening their price to the merchant and manufacturer. A n d, in
“ this view, it must be allowed that no bank could be more advantageous
“ than such a one which locked up all the money it received [this is the
“ case with the Bank o f Amsterdam] ; and never augmented the circu«* lating coir, as is usual, by returning part o f its treasure into com<« merce. A public bank, by this expedient, might cut off much o f the
<« dealings of private bankers and money-jobbers ; and, though the state
“ bore the charge of salaries to the directors 3 nd tellers o f this bank (for,
“ according to the preceding supposition, it would have no profit from its
“ dealings), the national advantage resulting from the low price o f la-
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consisting of gold, or of paper, or of both, is rendered
excessive i when it has thus lifted up the gold price ot
«* bour, and the destruction o f paper credit, would be a sufficient corapensation.”— flum e’s Essay on M oney.
That the increase of the money of an individual state can have no very
great and permanent effect in raising the price of labour, or o f commodi­
ties, on account of the tendency of so much o f the coin as is excessive to
transport itself to other countries, as soon as it shall have raised the cost
o f articles above their general level in the world (the principle contended
for in the text), is shewn, on the authority of M r. Ilume himself, in the
following passage. M r. Hume, indeed, names money alone; but his ob­
servation is equally applicable to the case of money and paper taken toge­
ther, o f which I have spoken.
“ Suppose four-fifths of all the money in Great Britain to be annihi“ lated in one night, and the nation reduced to the same condition, with
“ regard to specie, as in the reigns o f the Harrys and Edwards; what
“ would be the consequence? M ust not the price o f all labour and comu modifies sink in proportion, and every thing be sold as cheap as they
** were in those ages ? W hat nation would then dispute with us in any
“ foreign market; or pretend to navigate or to sell manufactures at the
** same price which to us would afford sufficient profit? In how little
«* time, therefore, must this bring back the money which we had lost, and
“ raise us to the level of all the neighbouring nations; where, after we
*f have arrived, we immediately lose the advantage o f the cheapness o f la“ bour and commodities; and the farther flowing in of money is stopped
4( by our fullness and repletion ?
“ A gain; suppose that all the money of Great Britain were multiplied
“ five fold in a night; must not the contrary effect follow ? M ust not
4t all labour and commodities rise to such an exorbitant height, that no
“ neighbouring nations could afford to buy from us ; while their commc»
** dities, on the other hand, became, comparatively, so cheap, that, in
spite of all laws which could be formed, they would he rxn in upon us,
4f and ours flow out, till we fell to a level with foreigners, atd lose that
“ great superiority ot riches which has laid us under such disadvantages?
** N ow it is evident that the same causes which w ould correct these ex** orbitant inequalities, w ere they to happen miraculous'y, must prevent
“ their happening tn the common course o f nature ; and must fo r e ver, in
“ all neighbouring nations, preserve money nearly proportionate to the art
“ and industry o f each nation."—-Hume’s Essay on the Balance of
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.articles above the point at which they stand in adjacent
countries, the gold is obliged, by the operation of the
exchange, to transport itself to those other parts;
and that paper credit, therefore enhances the prices
not of that single spot in which it passes, but of the
adjoining places, and of the world. The state which
issues paper only in such quantity as to maintain its
general exchanges, may be considered as substituting
paper in the place of gold, and as gaining additional
stock in return for whatever coin it may cause to be
exported. It derives, therefore, from its own issue,
the whole advantage of this augmentation of capital.
It participates with other countries in that inconve­
nience of a generally increased price of commodities
which its paper has contributed to produce.
That the popular opinion which was lately enter­
tained of the great influence of paper credit in raising
the price not only of commodities in general, but of
provisions in particular, had no just foundation, is a
position which admits of easy proof.
First, that opinion has proceeded on the assumption
of the fact of a vast increase of the total circulating
medium of the kingdom, within the last two or three
years, the period during which the high prices have
subsisted. But I have shewn both that the amount
of the notes of the Bank of England has lately not
been such as to imply a material augmentation of the
circulating medium of the metropolis, and, also, that
the quantity of circulating medium in the country ne­
cessarily conforms itself to that of London, for which
it is exchangeable. It has obviously been the use of
country bank notes, and especially of the smaller
ones, in the place of gold, not in addition to it, which
has been th i chief occasion of the prevailing suspicion:
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for the common complaint has been not only that par
per has been multiplied, but, also, that guineas have
been hardly to be seen: and it has not been consi­
dered, that by this double invective some sort of ac­
knowledgement is made that the one article is only
that substitute for the other, by which none of the
supposed effect on the price of commodities can be
It is sometimes said, that the additional loans which
the paper of the country banks has enabled them to
furnish, have encouraged mercantile speculation; and
that we'may ascribe to the spirit thus excited much
of the late rise in the price of articles in general, and
of corn in particular.
There is an error in the public sentiment on this
subject, which it is important to correct.
It has been already shewn, that it is by the amount
not of the loans of the Bank of England, but of its
paper; or if of its loans, of these merely as indicating
the quantity of its paper, that we are to estimate the
influence on the cost of commodities. The same re­
mark may be applied to the subject of the loans and
paper of country banks. For the sake of more fully
illustrating this point, let us examine into the several
ways in which a country banker may be supposed to
extend his loans, without augmenting the quantity of
circulating medium in the kingdom.
He may be enabled to do this, first, through the en­
largement of the deposits lodged with him. In this
case some of his customers may be considered as lea­
fing with him, or as lending to him, a sum which is
it by him to other customers. This is the same
ing as if some individuals were to lend to others,
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without the intervention of the banker. Loans of this
nature will be admitted not to have the supposed in­
fluence on prices.
A country banker may also increase his loans, with­
out augmenting the quantity of the circulating medi­
um of the country, in the following manner. He may
extend the issue of his own paper, and then that pa­
per may circulate in the place of gold either hoarded
or exported. If the gold is hoarded; if a quantity of
coin locked up by one man equals the amount of the
new paper issued by another; it is plain that there
will not be the supposed influence on prices. If the
gold is exported, we must consider it in the same
light with any other commodity sent abroad. It is
true that the paper, according to this supposition,
may be said to give existence to an additional export­
able article: but so also does every increased exertion
of the national industry, as well as every favourable
harvest. An augmentation of prices is no more to be
interred from the creation of a new exportable com­
modity in the one case than in the others.
The following facts furnish a convincing proof that
the late high prices of corn have not been owing to
the enlargement of Bank of England paper.
By the account which the bank rendered to Parlia­
ment, it appears, that the amount of Bank of England
notes w as, on the 25th of February, 1795, 13,539,160/
In the three months immediately following the 25th
of February, 1795, the average price of wheat, in the
London corn-market, was about 51s. per quarter.
By the same bank account, it appears, that the
amount cf Bank of England notes was, on the 25th of
February, 1796, 11,030,116/. In the three months
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immediately following the 25th of February, 1796, the
average price of wheat, in the London corn market,
was about 94^. per quarter.
Thus wheat bore a comparatively low price when
the amount of bank notes in circulation was greater;
and a comparatively high price when their amount
was smaller. It bore the moderate price of 57s. per
quarter, at a time when the amount of Bank of Eng­
land notes was full as considerable (allowing for about
two millions of 1/. and 2l. notes) as it is known to
have been at any period.
Paper credit may be considered as tending, in some
respects, to reduce the price of commodities. It was
compared, in a former chapter, to a cheap species of
machinery, which is substituted in the place of a dear
one; and it is obvious, that, in proportion as any in­
strument of manufactures or commerce is less expen­
sive, the articles which it contributes to produce may
be afforded at a lower rate.
Paper credit, also, promotes general cheapness, by
sparing much expense and trouble in weighing, count­
ing, and transporting, money; and by thus facilitating
more particularly the larger transactions of the mer­
chant. M r. Ilum e appears to suppose, that, when a
great increase of it takes place, the augmentation is
artificially produced. But it has been shewn, that
mercantile persons naturally resoFt more and mere to
the use of paper, in proportion as wealth accumulates
confidence improves, and commerce advances. The
consumers of commodities may be considered as ha­
ving an interest in permitting the merchants to follow
their own plans of economy, in this respect, in the
same manner as in all others.
Federal Reserve Bank of St. Louis


But whatever may be the amount of that influence
on the price of commodities which ought to be as­
cribed to paper credit, one point is clear, namely, that,
during the period in which our paper has extended it­
self, our trade has prospered, the state of our agriculture
has advanced, and both the capital and the income of
the country have been augmented.
The chief mischiefs which, according to Mr. Hume,
are to be apprehended from any considerable addition
to our paper currency, may be stated to be the follow­
ing: first, the great enhancement of the price of Bri­
tish labour and commodities, an evil with which we
ought unquestionably to connect that of the diminu­
tion of the sale of our manufactures in foreign markets;
secondly, the inconvenience to which we may be ex­
posed in time of war through the want of sufficient
means of making remittances in bullion to other coun­
tries; and, thirdly, the confusion which the failure of
paper credit may produce at home in the event of any
great disorder in the nation.
That the first consequence (the great enhancement
of the price of British labour and commodities) can­
not follow from the enlargement of our paper curren­
cy in the degree which Mr. Hume supposes, has been
proved from the circumstance of our paper causing
guineas to go abroad, and tending, therefore, to raise
the prices of the world rather than those-of our own
single island. That our prices, however high, have
not been such as to lessen the vent abroad of our home
made articles, and have, therefore, not been raised
above the prices of other countries, is proved by those
documents from our custom-house which state the
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continually increasing quantity of manufactures ex­
ported by Great Britain.*
That the second evil (that of our being reduced to
difficulty in /naking remittances abroad in time of war
through the want of bullion) is one which there is
less reason to dread than Mr. Hume has imagined,
may likewise be inferred from recent experience. We
have been able to maintain the credit of our funds,
and to cariy on all our financial operations, during the
whole of fhe late expensive and protracted contest,
although in the commencement of it our stock of cir­
culating gold was probably less than in many former
periods; and although, also, in the last years of the
struggle,a period in which we lent considerable sums
to Ireland, and had to purchase immense quantities of
foreign grain, we were in a great measure deprived
of current coin, and the cash payments of the Bank
of England remained suspended.
Mr. Hume himself has remarked, “ That want of
money can never injure any state within itself; for
that men and commodities are the real strength of any
community.” He might have added, that Want of
money can never injure any state in its transactions
with, foreign countries, provided it sufficiently abounds

* The British manufactures exported in 1785 amounted to—

In 1786

to 11,830,000
— 12,053,000
— 12,724,000
— i 3 »7 7 9 >°00
— 14,921,000
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In 1792 to £.18,336,000
1796 —
1797 —
1798 —


with commodities which are in demand abroad, and
which it can afford to sell at a bullion price lower than
that for which foreign articles of a similar kind can
be afforded. The power of manufacturing at a cheap
rate is far more valuable than any stock of bullion.
Even the greatest quantity of gold which we can be
supposed at any time to possess, bears but a small
proportion to our extraordinary expenditure in time of
war, and affords a security which is extremely slen­
der in comparison of that which we derive from the
commercial capital, the manufacturing skill, and the
other resources of the country.
That the third evil (the confusion which the failure
of paper credit may produce in the event of any dis­
order at home) is less a subject for apprehension than
M r. Hum e and other British writers have conceived,
is a point which a great part of the preceding work
will have contributed to establish.
During the late scenes of trouble and consternation
on the continent, the possession of a stock of the
precious metals probably added little to the security
of any nation. When the French armies approached,
or when an insurrection was projected, a stock of gold
and silver possessed by a government bank might
contribute to invite attack; or if the fund should at
¿uch a juncture be expended in the public service, it
would not long continue to perform the office of a cir­
culating medium. It might even disappear after effect­
ing a single payment.
O ur own island has been preserved, through the
favour of Providence, from those violent convulsions
which have been felt on the continent. We have, how­
ever, been exposed to many smaller evils, and, in par-
Federal Reserve Bank of St. Louis


tteular, to the interruption of our mercantile credit
It was probable that the enemy, knowing how much
our political strength depended on our commercial
prosperity, and our commercial prosperity on the due
maintenance of mercantile confidence among us,
would direct his endeavours to the very object of ex­
citing alarms over the kingdom, with the view of thus
disturbing the course of our trade and manufactures.
I t therefore became us to protect ourselves by the
best means in our power against this species of injury;
and the continuance of the law for suspending the
cash payments of the Bank of England has been one
of the steps which parliament has deemed necessary.
There can be no doubt, that, in the situation in
which we have thus found ourselves placed, we have
been greatly benefited by the circumstance of our ha­
ving been previously accustomed to the free use of a
paper credit. In a commercial country, subjected to
that moderate degree of occasional alarm and danger
which we have experienced, gold is by no means that
kind of circulating medium which is the most desira­
ble. It is apt to circulate with very different degrees
of rapidity, and also to be suddenly withdrawn, in
consequence of its being an article intrinsically valu­
able, and capable of being easily concealed. If, du­
ring the war, it had oeen our only medium of pay­
ment, we might sometimes have been almost totally
deprived of the means of carrying on our pecuniary
transactions; and much confusion in the affairs of our
merchants, great interruption of manufacturing labour,
and very serious evik to the state, might have been
the consequences.
Paper credit has, an this account, been highly im­
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portant to us. Our former familiarity with it pre­
pared us for the more extended use of it. And our
experience of its power of supplying the want of gold
in times of difficulty and peril, is a circumstance
which, though it ought not to encourage a general
disuse of coin, may justly add to the future confidence
of the nation.
Federal Reserve Bank of St. Louis